US Fed’s Messages Confuse Financial Markets
The US economy may only need 1 rate hike between now an 2018 (if then) and the US Fed is eroding its credibility by indicating otherwise, St. Louis Fed President James Bullard said Friday, and he is asking for an overhaul of how the Fed views and discusses its policy.
Mr. Bullard is calling for the Fed to discard its practice of projecting long-run values for things like economic growth and the target policy rate, as it has little certainty about the future, and state that the economy is not likely to get much worse or much better than it is now, absent some outside shock.
Mr. Bullard said he felt the appropriate federal funds rate is around 0.63%, roughly a 0.25 pt above where it stands, and will likely stay there “for the foreseeable future.”
For the Fed to publish projections that it will rise steadily to historic norms of 3 or 4 has been and continues to be misleading.
The Fed’s “dot plot” of projected interest rate policy “looks to be too steep. Fed funds futures markets do not believe it. They are priced for a much shallower pace of increases as we can all see.
“The Fed’s actual pace of rate increases has been much slower than what was mapped out by the committee in the past. This mismatch between what we are saying and what we are doing is arguably causing distortions in global financial markets, causing unnecessary confusion over future Fed policy, and eroding credibility of the FOMC,” he said.
Mr. Bullard said, view the United States as in a sort of equilibrium where growth, unemployment and inflation are unlikely to fluctuate, leaving little reason to change the federal funds policy rate, currently in a range of 0.25 to 0.50%.
Mr. Bullard put that theory into practice at the Fed’s meeting this week, leaving his “dot” off the long-range rate projections. In doing so, he signaled he was the lone “dot” that saw only 1 rate increase between now and the end of Y 2018. A position that I agree with.
The Fed’s latest economic projections, released Wednesday, show it really expects little or no change in growth, unemployment or inflation through Y 2018. Though listening to Ms. Yellen one may not get that picture.
Monetary policy usually encompasses estimates of long-run equilibrium growth, unemployment and interest rates that the economy is expected to hang around, as a guide to how the economy might change over time.
Mr. Bullard says the current situation may be much more static, an equilibrium that monetary policy has no reason to try to shift.
“On balance, real output growth, the unemployment rate, and inflation may be at or near mean values that could be sustained over the forecast horizon provided there are no major shocks to the economy,” Mr. Bullard wrote.
Key macroeconomic variables including real output growth, the unemployment rate, and inflation appear to be at or near values that are likely to persist over the forecast horizon. Any further cyclical adjustment going forward is likely to be relatively minor.
Friday’s US major stock market indexes finished at: DJIA -57.94 at 17675.16, NAS Comp -44.58 at 4800.34, S&P 500 -6.77 at 2071.22
Volume: Quad Witching Day trade volume was heavy, with over 2-B/shares exchanged on the NYSE
- NAS Comp -4.1% YTD
- Russell 2000 +0.8% YTD
- S&P 500 +1.3% YTD
- DJIA +1.4% YTD
|HeffX-LTN Analysis for DIA:||Overall||Short||Intermediate||Long|
|Neutral (-0.06)||Neutral (-0.21)||Neutral (-0.15)||Neutral (0.17)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Neutral (-0.02)||Neutral (-0.03)||Neutral (-0.10)||Neutral (0.08)|
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Neutral (-0.09)||Neutral (-0.05)||Neutral (-0.19)||Neutral (-0.03)|
|HeffX-LTN Analysis for VXX:||Overall||Short||Intermediate||Long|
|Neutral (-0.13)||Neutral (-0.14)||Neutral (-0.04)||Neutral (-0.21)|
Have a terrific weekend.
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