Fed Sees Lower Interest Rated for Longer
After last week, the FOMC raised the fed-funds rates by a quarter of a point and Fed Chair Janet Yellen, during the press conference that followed the rate decision pointed to the relentless debate, which concerns practically all central bankers of the leading economies in the world, whether inflation targets should be raised, she showed her justified concerns about the fact that low interest rates were still required and that at a moment that economies like the US are running at a healthy pace and at full employment.
One of Ms. Yellen’s biggest concerns was that when a large number of people think today that we might be better off with a higher inflation objective than the actual 2% objective the Fed adopted in January 2012, she said: “A reconsideration of that objective needs to take account, not only of benefits of a higher in potential benefits, of a higher inflation target, but also the potential cost that could be associated with it,” adding “We very much look forward to seeing research by economists that will help inform our future decisions on this.”
In simple words, this means that Fed is “probably” not going to raise its inflation target rate any time soon because the risk is real that rates could get stuck at close to zero for long periods of time, which could trap any economy into a low-growth, low-inflation paradigm for long periods, while damaging prosperity and stability.
I also wouldn’t bet the Fed to be willing to overhaul its framework at a moment that the Fed’s Board of Governors will see new faces during the coming year while Ms. Yellen’s reappointment in February 2018 is still not a sure thing at all.
Do not forget that about 10 days ago a group of 22 progressive economists including Nobel Prize winner Joseph Stiglitz, former Minneapolis Fed President Narayana Kocherlakota, Joseph Gagnon, a fellow at the Peterson Institute for International Economics, and others, urged the Fed to appoint a Blue Ribbon commission to consider raising its 2% inflation target.
So, the discussion is likely to continue and let’s hope that from the 6 Fed speakers (NY Fed William Dudley; Chicago Fed Charles Evans; Fed Vice-Chair Stanley Fischer; Dallas Fed Robert Kaplan; St. Louis Fed James Bullard and Cleveland Fed Loretta Mester) we will hear this week, we will get some clarity.
It’s an undeniable fact that from an investor’s standpoint, this is a very important subject, as, at least for me, a higher inflation target means lower interest rates for longer…
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