Interest rates are unlikely to rise very much in the next few years. That is the message coming through from the Fed’s June 15 meeting and from Chairwomen Janet Yellen’s testimony to Congress this week. This is a notable change in tone over the last few weeks. The Fed capitulated to the realization its forecasts of growth have been too optimistic since the financial crisis. Economic growth is subpar; growth likely will remain sub-par. Likely, headwinds to growth are not temporary, but more long-term in nature.
Fed Holds Interest Rates Steady and plans Slower Increases. The Federal Reserve decided against raising its key interest rate and says increases will be implemented more slowly than planned. This suggests Fed officials increasingly regard mediocre global economic growth as an enduring malaise. The decision to delay an increase was backed by every member of the committee. Click here to read the full article
Uncertainty at the Fed. In the wake of the 2008 financial crisis, it seems the Fed does not know the true state of the economy or how best to model it. The Fed has been consistently more optimistic than market expectations, which has led observers to conclude the Fed has an incorrect understanding of the economy. The Fed does not seem to be updating its view of the economy in an understandable way, leading many to lose confidence in the Fed’s capacity for sound decision-making. Consumers and businesses can’t make good decisions with this kind of policy uncertainty. Click here to read the full article
Message from the Fed: “This is as good as it’s going to get’. A leading member of the central bank released a paper asserting that present conditions are likely to persist at least the next 2 ½ years. The St. Louis Fed is switching to a new forecasting style that does not incorporate a long-run estimate. The new approach essentially gives up the idea that there is a long-run “steady state” the economy and rates are moving toward. Rather, because the economy and rates have stubbornly refused to budge, the new framework acknowledges this reality—the current state will persist into the foreseeable future. One economist cited in this article said: “It reinforced a notion that they’re not more prescient than the average person looking at the economy, looking at jobs, although they may use more erudite language than the rest of us. Click here to read the full article
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