14 Jan 2016
FED to tighten policy at a faster rate than currently discounted - Wells Fargo
FXStreet (Córdoba) - Analysts from Wells Fargo, studied monetary policy rules to explore the risks of the normalization of the interest rate policy at the Federal Reserve with its implication on the decision making process.
Key Quotes:
“We expect continued caution, at least initially, on the part of the FOMC. That said, the further the funds rate moves from zero, the more symmetric the risks in policy become, as the Fed would then have room to be either more accommodative or restrictive, depending on the incoming data.”
“Although members of the FOMC claim they are taking a balanced approach to policy, we believe this might not truly be the case until policy is sufficiently away from zero. If this hypothesis is true, and the Fed’s emphasis on flexibility seems to support this, a gradual beginning to the tightening cycle could be followed by a somewhat more rapid pace of rate hikes as the labor market continues to improve. However, low inflation should continue to give the Fed additional room for caution in the near term.”
“We maintain that the Fed will tighten policy at a rate faster than what is currently discounted by the market, although not as fast as the FOMC’s latest projections in 2016. Moving into 2017, we see more methodical increases in line with the dot plot.”
Key Quotes:
“We expect continued caution, at least initially, on the part of the FOMC. That said, the further the funds rate moves from zero, the more symmetric the risks in policy become, as the Fed would then have room to be either more accommodative or restrictive, depending on the incoming data.”
“Although members of the FOMC claim they are taking a balanced approach to policy, we believe this might not truly be the case until policy is sufficiently away from zero. If this hypothesis is true, and the Fed’s emphasis on flexibility seems to support this, a gradual beginning to the tightening cycle could be followed by a somewhat more rapid pace of rate hikes as the labor market continues to improve. However, low inflation should continue to give the Fed additional room for caution in the near term.”
“We maintain that the Fed will tighten policy at a rate faster than what is currently discounted by the market, although not as fast as the FOMC’s latest projections in 2016. Moving into 2017, we see more methodical increases in line with the dot plot.”