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Is the Fed Done Raising Rates?

*, by Bill Dudley, March 6, 2019

”The U.S. Federal Reserve recently modified its assessment of the economy, saying that it will be “patient” in deciding whether to further remove stimulus. This has led financial markets to conclude that the world’s most powerful central bank won’t be raising interest rates any further in this economic cycle.

People should be careful about jumping to such conclusions. Although the Fed is likely to stay on hold for the next few months, after that it’s anybody’s guess.

I see various reasons for the Fed’s change in language and stance — none definitive, but collectively significant.

All this means that the risk of raising rates too far, and hence inadvertently causing a U.S. recession, has increased. Meanwhile, the lack of inflationary pressures means that the cost of taking a “wait and see” approach has declined. In this environment, how could the Fed explain further tightening?

How long the Fed remains patient, though, will depend on how the conditions that justified its patience evolve. Already, the case for waiting has lessened somewhat. Financial conditions have eased in 2019, as the U.S. stock market has rebounded from its December slump. Now that China is focused on stimulating growth, the global outlook is improving. And if U.S.-China talks make progress, some of the uncertainties on the trade front could be resolved.

That said, it will take more to move the Fed. In particular, the central bank needs to see evidence that U.S. growth will be strong enough to push the unemployment rate down further, and that this could cause wage and price inflation to accelerate. This is an example of “threshold effects”: Monetary policy changes in fits and starts, not smoothly and continuously. Evidence has to accumulate before it can motivate a shift in course.

Such inertia means that monetary policy is very likely on hold through the first half of 2019. Even if the economy were to do well and inflation indicators started rising, it would take some time to overcome the Fed’s current inclination to be patient.”


*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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