MY TAKE:
Higher interest rates, please: The Fed must raise its long-term target for a soft landing
https://thehill.com/opinion/finance/4701798-the-fed-needs-to-set-a-higher-target-for-long-term-interest-rates/
Higher interest rates, please: The Fed must raise its long-term target for a soft landing
https://thehill.com/opinion/finance/4701798-the-fed-needs-to-set-a-higher-target-for-long-term-interest-rates/
The most popular guessing game on Wall Street this year has been to ascertain when and by how much the Federal Reserve will cut interest rates. Shifting expectations surrounding a potential Fed pivot have caused wild market gyrations and overreactions.
Fed policymakers have not helped matters. They have repeatedly characterized their decisionmaking process as “data-dependent,” implying a backward-looking approach that is more reactive than proactive. Some have gone as far as to suggest that a data-dependent Fed is essentially an unsure one….
So, what can the Fed do? First, its summary of economic projections scheduled for release in June should indicate a higher and more realistic estimate of the neutral policy rate of 3.5 to 4.0 percent, rather than the current projection of 2.6 percent.
Second, given the distinct possibility that the current policy stance may not be restrictive enough to reach the inflation target anytime soon, the Fed should explicitly state that it will be comfortable with inflation that is within a range around its 2 percent inflation target (say, in the 1.5-to-2.5 percent range). This would free up the Fed to initiate a few “insurance” rate cuts this year, to limit downside economic risks.
Although modest rate cuts in the coming months will boost the odds of a soft landing, the Fed still needs to curtail financial market exuberance and remain vigilant on the inflation front. The Fed therefore needs to project a shallow easing cycle and signal a higher estimate for the long-term neutral rate.
So, what can the Fed do? First, its summary of economic projections scheduled for release in June should indicate a higher and more realistic estimate of the neutral policy rate of 3.5 to 4.0 percent, rather than the current projection of 2.6 percent.
Second, given the distinct possibility that the current policy stance may not be restrictive enough to reach the inflation target anytime soon, the Fed should explicitly state that it will be comfortable with inflation that is within a range around its 2 percent inflation target (say, in the 1.5-to-2.5 percent range). This would free up the Fed to initiate a few “insurance” rate cuts this year, to limit downside economic risks.
Although modest rate cuts in the coming months will boost the odds of a soft landing, the Fed still needs to curtail financial market exuberance and remain vigilant on the inflation front. The Fed therefore needs to project a shallow easing cycle and signal a higher estimate for the long-term neutral rate.
Related:
Investors should ignore central bankers – they don’t know what they’re doing
https://www.telegraph.co.uk/business/2024/06/11/uk-wage-growth-too-hot-summer-interest-rate-cut/
https://www.telegraph.co.uk/business/2024/06/11/uk-wage-growth-too-hot-summer-interest-rate-cut/