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Fed More Sensitive to Fin Markets

Fed More Sensitive to Fin Markets

Gold Silver Reports — No longer is the Fed just waiting for financial markets to be hit by a bout of turbulence and then lowering interest rates in response -as former Chairman Alan Greenspan did. Instead, the critics contend, it’s become so sensitive to the risk of sharp market moves in the future that it’s pulling its policy punches now by repeatedly holding off on raising rates .

“They used to respond, I think excessively , to what financial markets did,“ said WillemBuiter, chief economist at Citigroup and a former policy maker at the Bank of England. “Now they don’t act in response to the fear that they have of how the market might respond to their actions.“

New York Fed president William Dudley suggested earlier this week that the central bank is paying close attention to how its possible policy moves might play out in the currency and other financial markets. The risk in such a strategy is that the Federal Open Market Committee loses credibility and finds itself hamstrung in carrying out policy , said investment analyst JimBianco .


“The market now thinks it runs monetary policy ,“ said Bianco, president of Bianco Research in Chicago. Buiter put it another way: “The Fed more than any serious central bank unfortunately appears to be the captive of the financial markets .“

Fed officials have regularly denied that there’s anything like a central bank “put“ -options-trading parlance for an implicit guarantee that the Fed wouldn’t let stocks fall too far -or that they ‘re led around by financial markets. They do pay attention to what’s going on in markets because of the knock-on effects that can have on consumers, companies and the overall economy.

“We are focused on Main Street, on supporting economic conditions -plentiful jobs and stable prices -that help all Americans,“ Fed Chair Janet Yellen had said. By becoming open about its intentions, the Fed is seeking to better align the markets with its thinking so that investors respond to developments in the economy the same way it does. — Neal Bhai Reports

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