Central Banks: Fighting Their Own Battles

1659 WordsFeb 24, 20187 Pages
More Mixed Signals from the Fed Having spent the weekend sifting through the minutes to 18-19 March Federal Open Market Committee (FOMC) meeting, I came away with the impression that there is a chasm between policy conduct and forward guidance. The underlying rhetorical tone of the minutes was dovish: short-term interest rates will remain at low levels for a protracted period. Despite this, the impression remains that the Fed, under Chair Yellen, is more hawkish in its policy stance than anybody expected. There were repeated references in the minutes that the Fed has badly missed the mark with respect to its dual mandate, particularly achieving the 2% inflation target. Given this failure, it seems odd that the Fed is pursuing tapering and making preparations for increasing interest rates, albeit some way off down the road. This paradox can be explained past policy behaviour. The Fed has put into place an extraordinary amount of monetary accommodation over the past few years. Continued declines in the unemployment rate are expected, but there are a number of FOMC members who are wary that the Fed could be caught badly behind the curve in terms of removing this accommodation once unemployment nears its natural rate (just below 6%). In order to prevent this risk, tapering asset purchases makes perfect sense, even though the Fed remains some way off from achieving its dual mandate. Under current circumstances, the Fed can be said to possess a so-called hawkish reaction
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