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Fed Cannot Act According to the Pre-set Calender

Fed Cannot Act According to the Pre-set CalenderGold Silver Reports — Fed Cannot Act According to the Pre-set Calender — In December, Federal Reserve officials indicated that they planned to raise interest rates by a quarter percentage point every three months for the next three years. That framework is in disarray , leaving investors and the general public guessing about how the Fed plans to manage the economy. 

When Chair Janet Yellen speaks later this week at the Kansas City Fed’s annual conference in Jackson Hole, she will have to offer a much more durable and convincing plan.

She could start by repudiating the idea that future interest rate moves will follow any kind of timeline. In a constantly changing economic environment, the Fed cannot promise to act according to a pre-set calendar.Suggesting otherwise has harmed the Fed’s credibility in the markets and, no less importantly , with Congress.

The Fed’s practice of releasing official forecasts of rate changes to the public every three months doesn’t help in this regard.Yellen should dismiss any idea that these forecasts have any relevance for the evolution of actual policy.

If not the calendar, then what should influence the Fed’s decisions? It’s not enough to say that officials will take into account a wide range of economic indicators. Instead, Yellen should identify a few important drivers. I see three that have been particularly salient in 2016: Inflationary pressures, downside economic risks and the labour market.

Inflation remains below the Fed’s target of 2%, as has been true for more than four years. The minutes of the central bank’s July policy-making meeting suggest that Fed staff expect inflation to remain below 2% through 2018 -a situation that hardly justifies a rate increase.

Downside risks are especially important at a time when the Fed, with interest rates already near zero, has limit ed capacity to mitigate further adverse shocks. The best response is to keep rates low now, so the economy will be as resilient as possible when any new shock hits.

The labour market situation is harder to parse. The unemployment rate, the Fed’s traditional measure of labour market slack, has been stuck at around 5% for nearly a year. That kind of stability -at near historical lows -would normally suggest that the economy is near full employment, the point beyond which inflation tends to become a problem. Yet, despite the aging of the population, nonfarm employment has kept increasing at a rate of 200,000 a month and participation in the labour force has been rising over the past year all of which indicates that the labour market has room to improve. Why not let it do so by holding off on rate increases?

In light of these three factors, the Fed’s decision to keep rates low in 2016 makes a lot of sense.Yellen should explain this connection and stress that such indicators are likely to remain central in the central bank’s decision-making over the next two years. When he was Fed chairman, Ben Bernanke used his Jackson Hole addresses in both 2010 and 2012 to describe the contours of the likely future course of US monetary policy . These speeches provided useful guidance for the public -and for the Fed’s policy-making Open Market Committee. I hope Yellen will provide that kind of guidance this week.  — Neal Bhai Reports

Fed Cannot Act According to the Pre-set Calender

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