The Federal Reserve has been dominating the business news landscape for quite sometime now. With the United States central bank continuing to leave us in suspense over whether or not it’ll raise interest rates, economists and officials are debating the merits of a boost in rates.
St. Louis Federal Reserve President James Bullard told an audience at CityWeek in London on Monday that he is concerned over the disconnect between the market and central bank’s expectations for the country’s first rate increase. He believes it could end in a “violent” reaction in the financial markets globally.
Bullard averred that a zero percent interest rate policy is unfeasible right now and a rate hike is the appropriate course of action for the U.S. economy.
“We’re talking so much about it that I hope it’d be anticlimactic when we get there. But there is this issue about the market expectations of a rate path being different from the committee’s expectations,” he said. “So if we get all the way to the day we actually make a decision and we end up surprising the markets that day, there’s going to be reconciliation on that day and that could be violent.”
According to Bullard, a violent reaction could be similar to what transpired in 2013. That summer’s “taper tantrum” was a violent reaction in the market as it originated from what the market was thinking about quantitative easing (QE) and what the Federal Open Market Committee was thinking.
When it comes to inflation, Bullard believes the “boom time” could potentially create a level of inflation that could surprise many. He urged policymakers and economists to refrain from going “to sleep” and ignore the risks that could be posed from an uptick inflation.
Meanwhile, Fed Vice Chairman Stanley warned that the central bank will likely avoid from a scheduled path of interest rate hikes if it does decide to raise rates this summer. He stated that an economic crisis, either at home or overseas, could prompt the Fed to decrease rates before increasing them again.
From 2004 to 2007, the Fed regularly raised its benchmark rates at nearly every meeting.
“A smooth path upward in the federal funds rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks — shocks like the unexpected decline in the price of oil, or geopolitical developments that may have major budgetary and confidence implications, or a burst of greater productivity growth, as the Fed dealt with in the mid-1990s, ” Stanley Fischer said in the prepared text of a midday speech for delivery at the Economic Club of New York.
Last week, the FOMC eliminated the term “patient” from its guidance and hinted that any rate hike could transpire anytime after the late April meeting.
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