Business

The Fed’s approach to interest rate policy is simpler than you think


Federal Reserve Board Chairman Jerome Powell speaks during a news conference following the two-day meeting of the Federal Open Market Committee (FOMC) in Washington, July 27, 2022.

Elizabeth Frantz | Reuters

It seems Federal Reserveinterest rate decisions, Wednesday deliveryand the next press conference organized by the President Jerome Powellis a Rorschach test for viewers.

In fact, the ink stains that observers claim to have seen are not quite as subjective as many think. Instead, most of what’s in the Fed’s statement, or discussed by the nation’s top central banker, is written in black and white.

The the first line of the statement acknowledges that spending and production are slowing. It also noted that the Fed is likely to continue raising interest rates to curb inflation.

The central bank also indicated that it could change policy if risks arise that affect the Fed’s ability to achieve its target.

Immediately, Fed watchers noticed that the central bank is now “dependent data“Here’s a hint: The Fed has always depended on data – and so do everyone else with access to information. There’s nothing to see here, except data.

A blunt tool

Speaking to reporters, Powell acknowledged that short-term interest rates controlled by the Fed are close to neutral and that the central bank is nearing the end of its rate hike cycle, so risk assets rise.

Investors know that the Fed seems to want to raise short-term interest rates between 3% and 3.5%. We are more than half way through since the rate started at 0.

Also, right off the bat, there’s been talk of a Fed “pivot”, implying that the central bank plans to lower interest rates if tightening credit conditions or other factors push the economy up. economy into a meaningful recession.

Powell points out there is nothing of the sort.

It is true that interest rate cycles are a never-ending series of ups and downs with the central bank frequently going too far in one way or another. The Fed is using a very blunt instrument to try to control for a number of factors that are beyond its control, hence the frequent overshoot.

This could be one of the most complex economic environments facing the Fed. Yes, there have been bubbles, market crashes, and financial crises over the past few decades. However, each of these events has risks that are identifiable and quantifiable to some extent.

Risk factors beyond the Fed’s control

inside Fed’s written statementPowell also verbally acknowledges that Russia’s war against Ukraine and related events is wreaking havoc on the global economy. That led to supply disruptions for a wide range of commodities, from computer chips to cars and from crude to corn oil.

These supply disruptions put upward pressure on prices. The Fed can’t control that kind of inflation, except by reducing demand to meet limited supply. That is hardly an optimal policy choice, but it is the only option the central bank has.

All that said, the message from the Fed, at least to me, seems simple: The rate hike is almost done.

It is premature to discuss a pivot, while talking about scaling to 5% is completely unreasonable. Both paths have been openly discussed by economists and experts.

Fed monitoring is not brain anatomy, nor is it a psychological assessment.

Markets, long understood what the Fed meant, reacted appropriately to Wednesday’s rate decision: We’re at the end of the tightening cycle, so it’s safer to buy stocks and bonds .

A new secular bull market will begin not just when the Fed stops raising rates – but when it starts cutting rates.

It’s not an ink stain test. That is history.

Ron Insana is a CNBC contributor and a senior advisor at Schroders.



Source link

news7f

News7F: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, Sports...at the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button