Tags: fed | economy | investors | trump

Fed Isn't Swayed by Inflation, Plans 4 Rate Hikes This Year

Fed Isn't Swayed by Inflation, Plans 4 Rate Hikes This Year
(Dollar Photo Club)

By    |   Thursday, 22 February 2018 07:52 AM

The minutes of the January 30-31 meeting of the Federal Reserve’s policy-setting Federal Open Market Committee (FOMC) made it relatively clear that tightening means tightening.

It’s as simple, or if you want, as complicated as that.

The minutes show that there was acknowledgment of stronger growth and the belief that higher inflation will result. That said, there was not however, a sense of particular alarm about inflation.

The whole tone of the minutes was consistent with the idea that the Federal Reserve will raise four times this year, but equally important that the Fed’s policy is not, and certainly not at the moment, aimed at squeezing inflation out of the economy.

The Fed is aiming to keep things broadly as they are and, in effect, to counter any inflation consequences from the huge fiscal expansion that is currently under way.

The FOMC minutes tells investors:

  • The Fed is trying to achieve stability.
  • The Fed is not trying to weaken demand.
  • The Fed is not trying to weaken pricing power.
  • The Fed’s tightening should not be seen as an anti-equity move.

In this context, I think, it is worth pointing out yesterday’s remarks of Minneapolis Fed President Neel Kashkari he made in an interview and whereby he said that financial markets overreact to data and the Federal Reserve should not.

One of the issues that we have had in recent years is that markets react to initial data releases and ignore data revisions. Sentiment data has tended to overreact to economic reality and markets give sentiment data far more attention than it deserves. In my opinion, the attention that it deserves is close to zero.

The fact of the matter is that equity markets are not that important economically, especially like at present when equities are substantially overpriced, and the gyrations of the markets are not something that policy makers should pay too much attention to.

Anyway, Kashkari said: “Wall Street overreacts to everything, they overreact on the upside, they overreact on the downside. We can’t make policy based on market blips up and down.”

He also added: “I don’t want to overreact to one job report, which showed the wage increases of about 2.9 percent, or the latest CPI numbers. Again, we don’t want to dismiss the data, but I also don’t want to overreact to one month’s blip in the data.”

By the way, the report of the Bureau of Labor Statistics on the employment situation that was issued on February 2 reads: “In January, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.74, following an 11-cent gain in December. Over the year, average hourly earnings have risen by 75 cents, or 2.9 percent.”

Finally, about the fact that the word “further” is mentioned not less than 26 times in the just released FOMC Minutes, Kashkari gave also an interesting comment: “We debate each word change in the statement -- a lot of debate goes into those -- and I think ‘further’ is intended to say continuing the current path that we’re on, and I think that’s the debate that we’ve been having.”

Kashkari is not a voter on U.S. monetary policy this year and last year he voted against all three rate increases the Fed delivered.

Today, there are assorted Federal Reserve speakers on the agenda with Federal Reserve Vice Chairman for Supervision Randal Quarles, New York Fed President William Dudley, Atlanta Fed President Raphael Bostic and Dallas Fed President Robert Kaplan.

It is unlikely that any of them will add anything that financial markets could get excited about.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The whole tone of the minutes was consistent with the idea that the Federal Reserve will raise 4 times this year, but equally important that the Fed’s policy is not, and certainly not at the moment, aimed at squeezing inflation out of the economy.
fed, economy, investors, trump
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2018-52-22
Thursday, 22 February 2018 07:52 AM
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