Front-running the Fed on interest rate hikes


The biggest takeaway from the latest Federal Reserve Open Market Committee meeting was the reduction in the ‘normal’ rate of unemployment from the 5.2-5.5% range to a 5.0-5.2% range. While the Fed did remove its ‘patient’ language regarding rate hikes, the lower unemployment levels give the Fed more room to stay accommodative. Some thoughts below

“With central banks, the problem with forward guidance is that they can give all the guidance they want but if the conditions on the ground change, the guidance will change. And everyone knows that. The dilemma for getting forward guidance to have an impact on expectations then is convincing markets that the central bank is going to stick to its guidance despite its desire to deviate. If a central bank’s forward guidance loses credibility, markets will discount any guidance from it, front-run their decisions, and the central bank will lose all influence over long-term interest rates.”…

Front-running the Fed on interest rate hikes

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