Category: Central Banks

Dollar close to 2015 lows as conflicted Fed prepares policy update

Reuters/Abhinav Ramnarayan & Ritvik Carvalho/09-20-17

…[C]aught between a lull in U.S. inflation and a strengthening global economy, the market is uncertain whether the Fed will signal its third interest rate hike of the year or back off until prices rise more briskly.

“Fed members have become less hawkish of late, and that has started to weigh on the dollar,” said OANDA analyst Craig Erlam.

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Posted in Central Banks, Fed, Monetary Policy, U.S. Dollar |

Traders Boost Odds of Third Rate Hike This Year as FOMC Meets


Bloomberg/Alex Harris/09-19-17

Will they or won’t they hike, that’s what traders are asking themselves before Wednesday’s policy decision from the Federal Open Market Committee. The odds of a hike by December have jumped to around 50 percent, based on fed funds futures, from 22 percent on Sept. 8. Wrightson ICAP economist Lou Crandall said as long as the Federal Reserve doesn’t take a rate hike “off the table this week,” the market may continue to push up the implied odds of another increase by year-end.

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Posted in Central Banks, Fed, Monetary Policy |

Fed economist: ‘No evidence that QE works’ as central bank starts unwinding program

CNBC/Jeff Cox/09-19-17

The Federal Reserve is on the cusp of reversing the most ambitious monetary stimulus program in world history amid questions over how much impact it really delivered.

There’s little question that the program, known as quantitative easing or “money printing,” boosted the stock market.

…”Evaluating the effects of monetary policy is difficult, even in the case of conventional interest rate policy,” St. Louis Fed economist Stephen D. Williamson wrote. “With respect to QE, there are good reasons to be skeptical that it works as advertised, and some economists have made a good case that QE is actually detrimental.”

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Posted in Central Banks, Fed, Monetary Policy, QE |

ECB seen keeping option to prolong bond-buying again in 2018: sources


Reuters/Francesco Canepa & Balazs Koranyi/09-19-17

European Central Bank policymakers disagree on whether to set a definitive end-date for their money-printing program when they meet in October, raising the chance that they will keep open at least the option of prolonging it again, six sources told Reuters.

A stubbornly strong euro, with its dampening effect on inflation, is driving a rift among ECB policymakers, the sources on the ECB’s Governing Council with direct knowledge of its thinking said.

…“The strength of the euro is the number one problem,” one of the sources said.

PG View: Some see euro strength not so much as evidence that the European economy is on firmer ground, but more that the U.S. and UK economies are weakening.

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Posted in Central Banks, ECB |

BoE votes 7-2 to keep rates on hold, but prepares market for a rise

FT/Chris Giles/09-14-17

The Bank of England has issued its strongest guidance in a decade that it is poised to raise interest rates, setting the stage for a nail-biting decision at the November meeting of the Monetary Policy Committee.

Voting seven to two against an immediate increase in interest rates at the September meeting, a majority of MPC members signalled that unless there is a sudden string of bad economic data “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”.

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Posted in BoE, Central Banks, Monetary Policy |

Time To Drain The Fed Swamp

First Trust/Brian S. Wesbury & Robert Stein/09-11-17

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

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Posted in Central Banks, Fed, Monetary Policy |

ECB steady on policy, remains prepared to extend QE if necessary. Inflation forecast trimmed for 2018 and 2019 on strong EUR. Draghi presser underway.

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Posted in Central Banks, ECB, Monetary Policy, QE |

Vice Chair Stanley Fischer stepping down from Fed, citing ‘personal reasons’

CNBC/Jeff Cox/09-06-17

Federal Reserve Vice Chairman Stanley Fischer is stepping down from his position at the central bank, he told President Donald Trump in a letter Thursday.

Citing “personal reasons,” Fischer said his resignation will take effect Oct. 13.

“It has been a great privilege to serve on the Federal Reserve Board and, most especially, to work alongside Chair [Janet] Yellen as well as many other dedicated and talented men and women throughout the Federal Reserve system,” Fischer wrote.

The resignation comes with his term to expire on June 12, 2018 and creates yet another opening for Trump to fill at a critical time for the Fed.

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Posted in Central Banks, Fed |

BoC surprised with a 25 bps hike to overnight rate to 1.0%. GOC yields and loonie surge.

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Posted in BoC, Central Banks, Markets, Monetary Policy |

Fed should be cautious in face of weak inflation: Brainard

Reuters/ Jonathan Spicer & Stephanie Kelly/09-05-17

U.S. inflation is falling “well short” of target so the Federal Reserve should be cautious about raising interest rates any further until it is confident that prices are headed higher, an influential Fed policymaker said on Tuesday.

In a dovish speech in the face of months of weak inflation readings, Fed Governor Lael Brainard said the U.S. central bank should go so far as to make it clear it is comfortable pushing prices modestly above the Fed’s 2-percent target.

“We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard, a permanent voter on monetary policy, said in a speech in New York.

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Posted in Central Banks, Deflation, inflation, Monetary Policy |

ECB President Draghi warns of ‘serious risk’ to global economy from rising protectionism

CNBC/Liz Moyer/08-25-17

European Central Bank President Mario Draghi said protectionist policies pose a “serious risk” for growth in the global economy.

At a gathering of central bankers, economists and others in Jackson Hole, Wyoming, on Friday, Draghi said the global economy is firming up. He told the audience in a speech that “a turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy.”

The comments come at a time when President Donald Trump is taking a hard look at the U.S.’s trade agreements around the world, pushing to reduce trade deficits and make conditions more favorable for American manufacturers.

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Posted in Central Banks, Economy, Monetary Policy |

Fed chair Janet Yellen pushed back against Trump’s agenda of financial deregulation — and it could cement her future


BusinessInsider/Pedro Nicolaci da Costa/08-25-17

Federal Reserve Chair Janet Yellen had a clear message for the Trump administration in what could be her final Jackson Hole speech: Undoing the hard work of reforming the financial system after the financial crisis could have dangerous consequences.

…In her keynote address at the high-profile conference in the Grand Teton mountains of Wyoming, Yellen was not holding back — in a way that potentially suggests she is not holding her breath for a reappointment from Donald Trump. Yellen’s term as Fed chair expires in February, and Trump is widely expected to nominate Gary Cohn, ex-president of Goldman Sachs and head of the president’s National Economic Council, to replace her.

“Fed Chair Janet Yellen’s passionate defence of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House,” wrote Paul Ashworth, economist at Capital Economics, in a research note following the speech. “Donald Trump has made rolling back regulation the centre-piece of his presidency.”

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Posted in Central Banks, Economy, Monetary Policy |

The Fed ponders the fractious politics of debt

FT/08-24-17

These days it is Ms Yellen who has more cause to fear political risk upsetting the bond markets. The US Congress has to raise the “debt ceiling” by late September to allow the government to continue financing itself. These occasions were bad enough when Mr Obama was president. The Republican Congress repeatedly used the threat of default to pursue its wrong-headed obsession with trying to cut spending.

Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos. Mr McConnell said this week there was “zero chance” that the debt ceiling would not be raised. But Mr Trump’s threat at his bombastic rally on Tuesday to close down the government if he did not win funding to build his Mexican wall sent shivers through debt and foreign exchange markets.

Given Donald Trump’s eccentricity and his fraught relations with Mitch McConnell, the Senate leader, there is an even greater chance of chaos…

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Posted in Central Banks, Debt, Monetary Policy |

Yellen, Draghi Head to Jackson Hole Amid Inflation Unease

Bloomberg/Jeanna Smialek & Carolynn Look/08-21-17

As the world’s top central bankers gather in Wyoming this week, their relief about a stronger global economy will be tempered by a growing unease that inflation remains inexplicably low.
The most important market news of the day.

Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi will be among the officials addressing this year’s installment of the annual conference hosted by the Kansas City Fed. The summit, held at a Jackson Hole mountain retreat, comes as central banks in advanced economies creep toward the policy exit after years of unprecedented easing, even with outlooks are clouded by stubbornly tepid inflation.

Prices have been slow to pick up despite solid growth and falling unemployment, suggesting that the long-observed relationship between inflation and labor-market slack might have frayed. That puzzle will likely surface as the conference debates this year’s theme of “Fostering a Dynamic Global Economy” against the backdrop of the Grand Teton mountains.

“Inflation has been the big question mark, both here and abroad,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. in New York.

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Posted in Central Banks, Deflation, inflation, Monetary Policy |

Stability concerns focus at Fed ahead of Yellen speech

Reuters/Howard Schneider/08-18-17

The stock market’s steady rise, still low long-term bond yields and a sagging dollar are girding the Fed’s intent to raise interest rates again this year despite concerns about weak inflation, according to comments this week from Fed officials and analysts anticipating remarks next week by Chair Janet Yellen.

Minutes of the July Federal Open Market Committee meeting released this week flagged a division among policymakers focused on weak inflation as a reason to stall further rate increases and those who feel still loose financial conditions pose a risk the Fed needs to counter.

…”I would not be surprised to see Chair Yellen outline a similar argument at Jackson Hole — namely, that financial conditions are a piece of the puzzle that currently support maintaining a gradual pace of tightening,” analysts from NatWest Markets Strategy wrote in a morning note.

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Posted in Central Banks, Monetary Policy |

Fed Officials Confront New Reality: Low Inflation and Low Unemployment


NYT/Binyamin Appelbaumaug/08-16-17

Federal Reserve officials are struggling to make sense of a new economic reality in which low inflation and low unemployment are persisting side by side.

…The timing of the Fed’s next rate move is considerably less certain. The Fed entered the year predicting three rate increases of a quarter-point each; so far it has delivered two, with a third seen possible in December.

But the weakness of inflation, which the Fed now expects to remain below its target annual pace of 2 percent for the fifth-consecutive year, is prompting some Fed officials to hesitate.

…Some Fed officials have suggested that the public is losing confidence that the Fed will raise inflation back to a 2 percent annual pace, which could make it harder for the Fed to do so, because inflation expectations can become self-fulfilling.

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Posted in Central Banks, Monetary Policy |

Fed Officials Split Over Next Rate Increase

WSJ/David Harrison/08-16-17

Federal Reserve officials meeting in July split over the timing of future interest-rate increases as they struggled to understand why inflation has been so weak in recent months. But they agreed to soon begin the yearslong process of drawing down the central bank’s holdings, according to minutes of the July 25-26 meeting released Wednesday after the customary three-week lag.

Sagging inflation led some officials to suggest holding off on raising rates again for now, arguing the Fed “could afford to be patient under current circumstances.”

Others, however, worried that the strong labor market and high stock prices could produce a spurt of inflation above the central bank’s 2% target that could be difficult to control. This group cautioned that waiting too long to raise rates “could result in an overshooting of the [Fed’s] inflation objective that would likely be costly to reverse,” the minutes said.

PG View: I find it amusing that the Fed continues to be worried about an overshoot on inflation.

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Posted in Central Banks, Monetary Policy |

Martin Wolf: Nothing like this has happened in 323 years


FT/Martin Wolf/08-15-17

The Bank of England was founded just over 323 years ago, in July 1694, at the instigation of King William III. It is the second oldest continuously-functioning central bank in the world, after Sweden’s Sveriges Riksbank, founded in 1668.

The Bank of England supported the UK’s public finances and stabilised the British financial system through the wars with Revolutionary and Napoleonic France, two world wars and the Great Depression. Throughout that period, the Bank has made secured overnight loans to commercial banks (under different names).

Prior to January 2009, the Bank had never lowered its lending rate below 2 per cent. But it was then lowered to 1.5 per cent, on its way to 0.5 per cent in March 2009 and 0.25 per cent in August 2016. This ultra-easy policy was further buttressed by a huge expansion of the Bank’s balance sheet, which now contains £435bn in UK government “gilt-edged” securities and £10bn in corporate bonds.

Throughout this prolonged recent period of ultra-easy monetary policy, the concern has never been one of runaway inflation, but rather of the opposite. This time really has been different. What does it mean for the future? Nobody knows.

PG View: The chart accompanying this article is fascinating. Worth noting that the Riksbank repo rate was as low as 0.25% in 2009 and early 2010 and remains below 2% to this day (1.5%).

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Posted in Central Banks, Monetary Policy, QE |

ROGOFF: The world’s central banks should get ready for negative interest rates in the next recession

BusinessInsider/Will Martin/08-14-17

Kenneth Rogoff, a professor at Harvard University and one of the world’s most prominent economists, said central banks across the globe must start preparing themselves to introduce negative interest rates during the next global recession.

… “It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said, citing the growth of cashless transactions as a reason to think that negative rates could be implemented more easily in future.

“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”

PG View: That “next global recession” is coming . . .

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Posted in Central Banks, Monetary Policy, Negative interest rates |

A looming threat to the stock market’s calm is not even on investors’ radar


BusinessInside/Pedro Nicolaci da Costa/08-09-17

In normal times, a looming changing of the guard in the world’s most powerful central bank would be dominating Wall Street’s attention. But these are not normal times.

With headlines consumed by Donald Trump’s chaotic presidency — investigations into possible campaign collusion with Russia, the collapse of healthcare legislation promised for seven years, and now a diplomatic standoff with North Korea — the strong likelihood that Trump will replace Janet Yellen with Gary Cohn, the former president of Goldman Sachs who now leads the president’s National Economic Council, has barely registered.

“Any time you pick someone who’s got a deep academic track record, like a Bernanke, like a Yellen, you have a highly predictable setting for monetary policy,” Neal Soss, the vice chairman for fixed income at Credit Suisse Securities, said in an interview with Bloomberg TV.

…”Gary Cohn doesn’t have that kind of grounding, so from the point of view of Fed watchers there’s at least an initial phase where you have to view that as a less predictable figure and a less predictable policy stance.”

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Posted in Central Banks, Monetary Policy, Politics |

Fed’s Evans says reasonable to begin trimming balance sheet next month

Reuters, via CNBC//08-09-17

Low inflation will not stop the Federal Reserve from beginning to shrink its $4.5 trillion balance sheet next month, but will likely force it to delay further interest-rate hikes until December or even beyond, a U.S. central banker said on Wednesday.

“I personally think that it would be quite reasonable to (begin trimming the Fed’s balance sheet) in September on the basis of the data that I’ve seen so far, even with the potentially temporary lower inflation data,” Chicago Federal Reserve Bank President Charles Evans said in an interview at the bank’s headquarters.

But while Evans has supported both of the Fed’s rate hikes this year, a third remains a subject for discussion.

“What I’ve just outlined would put on the table in December possibly one increase, but if you thought that inflation was weaker and we needed more accommodation you could decide to put that off until later,” said Evans, who has a vote on the Fed’s policy-setting committee this year.

PG View: Even quantitative tightening into a weak economy poses risks . . .

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Posted in Central Banks, Monetary Policy |

Bank of England leaves rates on hold, cuts growth forecast, still hints at 2018 rise

Reuters/William Schomberg & David Milliken/08-03-17

The Bank of England kept interest rates at a record low again on Thursday and cut its forecasts for growth and wages as Brexit weighs on the economy.

Governor Mark Carney said, however, it would not take much of a pick-up to justify a rate hike. The Bank also reiterated it might raise borrowing costs a bit more than investors expect over the next three years, possibly within a year.

There is a desire among major central banks to move away from post-financial crisis ultra-loose monetary policy, but many are finding it hard to do so without killing off growth.

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Posted in Central Banks, Monetary Policy |

BoE holds rates at record lows, downgrades both growth and inflation expectations.

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Posted in Central Banks, Monetary Policy |

The market doesn’t think the Fed will take away the punch bowl anytime soon — and it’s the Fed’s own doing

BusinessInsider/Komal Sri-Kumar/07-28-17

The Federal Reserve concluded its two-day meeting on Wednesday. Investors had anticipated no change in the central bank’s interest rate policy, nor an imminent decision to shrink its $4.5 trillion balance sheet. They were not surprised. The only significant change in the Fed statement was that the process of not investing all the maturing securities would begin “relatively soon.” At the conclusion of its previous meeting on June 14, the Fed had anticipated that such a tapering would occur “this year.”

Markets took the change in statement to mean that the balance sheet reduction, at an initial slow pace of $10 billion per month, could be announced by the Fed as early as its next meeting on September 20, and become effective October 1. While the pace of not investing all maturing securities would be glacial to begin with, it would be a sea change in policy — after all, the Fed’s asset holdings have been a one-way street since the financial crisis, rising from about $800 billion on “Lehman Day” (September 15, 2008) to its current level of $4.5 trillion. The Fed calls the balance sheet reduction process “normalization,” and the move is supposed to mark the beginning of the end of “emergency” measures that the then chairman, Ben Bernanke, introduced as long ago as January 2009. It has indeed been a long emergency period from the Fed’s point of view!

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Posted in Central Banks, Monetary Policy |

Dollar turns lower after Fed is read as adopting a more dovish tone

MarketWatch/Ryan Vlastelica/07-26-17

The U.S. dollar fell on Wednesday, erasing an earlier gain after the Federal Reserve was seen as striking a somewhat cautious note on inflation, which is seen as bearish for greenback.

The U.S. central bank said inflation was “running below 2%” instead of “running somewhat below 2%,” as it had in its June statement. The Fed’s preferred inflation gauge, the personal-consumption index, or PCE index, has tapered off to 1.4% growth over 12 months from a five-year high of 2.1%.

The Fed also indicated, as expected, that it would start to wind down its bondholdings “relatively soon” and kept interest rates unchanged, as had been widely expected.

PG View: The dollar index tumbled to fresh 13-month lows after the Fed’s announcement, providing on ongoing tailwind for gold.

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Posted in Central Banks, inflation, Monetary Policy, U.S. Dollar |

The Greater Moderation

Money Strong/Danielle DiMartino Booth/07-26-17

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

PG View: This is an excellent essay by former Fed insider Danielle DiMartino Booth. I highly encourage you to read it in its entirety and realize too that, “The Fed’s actions have not saved the little guy; they’ve skewered him.”

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Posted in Central Banks, Monetary Policy, Negative interest rates, QE |

Fed keeps rates unchanged, says balance-sheet unwinding to start ‘relatively soon’

FT/Sam Fleming/07-26-17

The Federal Reserve signaled it is ready to start unwinding its crisis-era stimulus programme as soon as its next meeting, suggesting that the central bank remains confident in the US outlook even as it acknowledges a spate of weak inflation readings.

The Fed kept rates unchanged at 1 per cent to 1.25 per cent at the meeting, as expected by financial markets. But in a sign of resolve on its policy committee, the Fed said in a statement that it was ready to start paring back the size of its balance sheet “relatively soon” as long as the economy stays on track.

PG View: The Fed is more concerned about the decline in inflation, but remains optimistic that it will return to the 2% target in time. Sep rate hike odds dropped from 8.2% to 3.1%.

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Posted in Central Banks, Monetary Policy |

Fed holds steady on policy, in line with expectations. Overall and core inflation “have declined.” Balance sheet unwind to start “relatively soon.”

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Posted in Central Banks, Monetary Policy |

U.S. Inflation Remains Low, and That’s a Problem

NYT/Binyamin Appelbaum/07-24-17

That notion is a bit of a head-scratcher. Most people don’t like inflation. They would prefer that a dollar tomorrow be worth the same as a dollar today.

But a recent drop in inflation may be a sign of fresh economic weakness and is perplexing to Federal Reserve officials who are now wrapping up the central bank’s stimulus campaign.

The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. Inflation has been stubbornly sluggish.

A little inflation can brighten the economic mood, causing wages and corporate profits to rise more quickly. Economists like to point out that this is an illusion. If everyone is making more money, then no one can buy more stuff. Prices just go up. But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways that increase actual economic growth, for example by working harder.

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Posted in Central Banks, inflation, Monetary Policy |

Fed Faces Inflation Conundrum

WSJ/Nick Timiraos/07-19-17

The Federal Reserve is likely to stand pat on policy when it concludes a two-day meeting next week, but it faces a debate about the future path of interest-rate increases because of a deepening puzzle over inflation.

Officials will likely leave short-term rates unchanged and wait until September before announcing plans to slowly shrink their $4.5 trillion portfolio of bonds and other assets.

They face a dilemma, however, because the two sets of economic indicators they most closely monitor are sending conflicting signals about the urgency of additional rate increases.

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Posted in Central Banks, Monetary Policy |