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The Path to Normal Interest Rates Just Got Longer

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Part 2
The Path to Normal Interest Rates Just Got Longer PART 2 OF 12

A Host of Factors, Domestic and External, Are Bothering the Fed

Domestic factors

Inflation has been the primary foe of policymakers at the Federal Reserve. It has nearly single-handedly held back rate hikes for quite some time. It can be argued that policymakers at the central bank have been ultra-conservative and have given up on various opportunities in the past to normalize the interest rate.

But putting that argument aside for the moment, there’s little to debate about inflation having played a pivotal role in delaying and deferring rate hikes over the past two years or so. If the credibility of the Federal Reserve wasn’t at stake, there may not have been a rate hike in December 2015 for the first time in nearly a decade.

A Host of Factors, Domestic and External, Are Bothering the Fed

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But it’s not just inflation anymore. The poster boy of feel good for the US economy—the labor market—isn’t looking very good. For two successive months, job additions have disappointed. We’ll look more closely at the job market later in the series, but it would be appropriate to say that there are dark clouds closing in on that silver lining.

External factors

Fed policymakers have also been plagued with external factors. First it was China (FXI) (YINN), and now Britain (DBEU) (VGK) (IEV) is commanding the spotlight. Just when they thought everything would be alright and 2016 would be the year when rates would normalize, China shook the world early in the year with its unstable economic fundamentals.

The China story is far from over. But it’s not the only story troubling the financial markets. The Britain story has been simmering in the background and is now coming to a boil. This has global equities (VEU) (VT) and bonds worried. Let’s take a closer look at both of these stories in the next part of the series.

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