Why Higher Rates Are Unlikely to Derail the Recovery
The Fed then has to hike rates in order to curb inflation. Higher rates, however, negatively affect growth.
A nominal midyear rate hike in the US could have affected at least the first stage of liftoff, and the process of monetary policy normalization could have begun.
Potential new developments from the Fed include a suggestion by the subcommittee on communications that median values of policymakers’ projections be published.
The Fed’s decision to continue with reinvestments rather than reduce them is important to keeping long-term interest rates low, supporting the mortgage market, and keeping financial conditions accommodative.
Because the Fed wants to maintain stability in US financial markets, it is important to assess whether present foreign developments will put the domestic market through tumultuous times.
Cushing, Oklahoma WTI prices fell to $41.93 a barrel on August 17—the lowest since early March 2009. Iran flooding the market with its oil is one of the reasons for this fall.
Fixed income instruments reacted positively to the FOMC’s July 2015 minutes, giving hope that a rate hike may be delayed given the present macroeconomic circumstances.
The FOMC, the select group of policymakers who decide the direction of monetary policy in the US, seemed uncertain about the timing of a federal funds rate hike if the July 2015 minutes are an indication.
Unlike other indicators in this series, the Federal Reserve has an explicit mandate from the US Congress to maintain PCE inflation at 2% in the longer term.
Labor market slack refers to the underutilization of the available workforce. One of the indicators that measures slack in the labor market is the labor force participation rate.
If the economy is well primed for a rate hike, it would react well as corporate profits are expected to increase in favorable economic conditions.
A note of caution to investors: Housing indicators are always volatile and subject to large revisions.
In July 2015, the US unemployment rate stood at 5.3%. The US labor market is quite close to what central bankers consider to be full employment.
Unlike consumers, market participants have very low hopes about inflation reaching the 2% level, even in the next five years.
The inflation expectation survey conducted by the University of Michigan asks consumers about their expected level of inflation in the coming year, as well as in the coming five years.
The Fed does not explicitly track the US dollar while deliberating on the path of monetary policy. However, the dollar’s status can show up in US economic output in the form of net exports.
A country’s net exports measure the value of total exports minus the value of its total imports. This indicator is positive if exports are larger in value than imports; otherwise, it is negative.
Business fixed investment represents business spending on plants, equipment, and machines. It forms an important component in the calculation of economic output.
Consumer spending is the most important component of US economic output in terms of size, as it forms more than two-thirds of the country’s total economic output.
From the perspective of monetary policy, a strong rate of economic growth is required for a central bank to tighten policy.