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Fed's Higher Inflation Target Means Lower Interest Rates for Longer

Fed's Higher Inflation Target Means Lower Interest Rates for Longer
(Maksym Yemelyanov/Dreamstime)

Monday, 19 June 2017 10:50 AM Current | Bio | Archive

After last week, the Federal Reserve raised the fed-funds rates by a quarter of a point and Fed Chair Janet Yellen, during the press conference that followed the rate decision pointed to the relentless debate, which concerns practically all central bankers of the leading economies in the world, whether inflation targets should be raised, she showed her justified concerns about the fact that low interest rates were still required and that at a moment that economies like the U.S. are running at a healthy pace and at full employment.

One of Yellen’s biggest concerns was that when a large number of people think today that we might be better off with a higher inflation objective than the actual 2 percent objective the Fed adopted in January 2012, she said: “A reconsideration of that objective needs to take account, not only of benefits of a higher in potential benefits, of a higher inflation target, but also the potential cost that could be associated with it,” adding “We very much look forward to seeing research by economists that will help inform our future decisions on this.”

In simple words, this means that Fed is “probably” not going to raise its inflation target rate any time soon because the risk is real that rates could get stuck at close to zero for long periods of time, which could trap any economy into a low-growth, low-inflation paradigm for long periods, while damaging prosperity and stability.

I also wouldn’t bet the Fed to be willing to overhaul its framework at a moment that the Fed’s Board of Governors will see new faces during the coming year while Yellen’s reappointment in February 2018 is still not a sure thing at all.

Besides that, let’s not forget that about 10 days ago a group of 22 progressive economists including Nobel Prize winner Joseph Stiglitz, former Minneapolis Fed President Narayana Kocherlakota, Joseph Gagnon, a fellow at the Peterson Institute for International Economics, and so on, have urged the Federal Reserve to appoint a blue-ribbon commission to consider raising its 2 percent inflation target.

So, the discussion is likely to continue and let’s hope that from the 6 Fed speakers (NY Fed William Dudley; Chicago Fed Charles Evans; Fed Vice-Chair Stanley Fischer; Dallas Fed Robert Kaplan; St. Louis Fed James Bullard and Cleveland Fed Loretta Mester) we will hear this week, we will get some clarity.

It’s an undeniable fact that from an investor’s standpoint, this is a very important subject, as, at least for me, a higher inflation target means lower interest rates for longer…

Over in Europe, French President Macron’s “En marche” (On the move) political party and its ally won a majority in the National Assembly election. 

The majority was not as large as had been predicted by opinion polls and the voter turnout was at a record low of 57.4 percent.

However, these facts are likely to play a very subordinated role position compared to the reality of a comfortable majority.

For investors, the focus will be on the prospects for Macron’s reform agenda, which will be supported by the reality of the majority.

However, opposition to reforms outside the French National Assembly, in particular from the trade unions, may be emboldened by the lower turnout as a signal of a less overwhelming mandate.

The U.K. begins today its negotiations to exit the EU today.

Even with leaks, the content is not expected to offer anything significant information for investors at this stage. The issues involved are too complex, and the desire to avoid overt confrontation at the start of the process is relatively clear.

The U.K. Chancellor Hammond has confirmed that the U.K. will be seeking to leave the single market and the custom union.

This had always been the established policy, but there had been some speculation about whether that might change. With over 80 percent of the lectorate, voting for parties in favor of leaving the single market, expectations of a change in position were perhaps unrealistic.

One of the problems in assessing the U.K.-EU negotiations is that the U.K. opinion polls have proved to be so unreliable as to make assessing the views of the general population on this subject makes this rather difficult.

Japanese trade data of May showed a deficit with significant import growth.

Distorted trade data in May is quite common in Japan because of the timing of Japanese public holidays.

The export data was generally good and is consistent with the idea of a global economy that is performing around its trend rate of growth.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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It’s an undeniable fact that from an investor’s standpoint, this is a very important subject, as, at least for me, a higher inflation target means lower interest rates for longer…
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Monday, 19 June 2017 10:50 AM
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