jeudi 26 mars 2015
The Fed’s five-year plan to get back to ‘normal’
Posted on 05:21 by nice news
One little word, or its absence, got all the attention at last week’s meeting of the Federal Open Market Committee (FOMC).
By removing “patient” from its official statement, the Federal Reserve’s rate-setting body seemed to indicate it was preparing to hike the federal funds rate over the coming months.
But in their obsession with exactly when the Fed will raise rates again, Wall Street and the financial media are missing the point: It doesn’t matter whether the Fed starts raising short-term rates in June or September or even early next year.
What does matter is that the Fed is moving slowly, deliberately to end rock-bottom-low interest rates and reduce the massive holdings of government and mortgage debt it accumulated since the financial crisis.
In fact, Chairwoman Janet Yellen and other prominent Fed officials have laid out a clear path to a more “normal” monetary environment. It may take several years, and when they’re done, it will be a “new” normal, with peak rates below where they once were. But they’re well on their way.
“I think it’s the same playbook we’ve been on for some time,” said James Hamilton, an economics professor at UC San Diego, who tracks the Fed and writes the Econbrowser blog. “The Federal Reserve is trying to get back to something more normal.”
The plan, which probably began under former Fed Chair Ben Bernanke (whose last vice chair was Janet Yellen) has been, first, to phase out the central bank’s extraordinary bond buying of Treasuries and mortgage-backed securities (called quantitative easing, or QE); then, to start raising the fed funds rate again, and finally, to shrink the Fed’s bloated balance sheet after several rounds of QE.
Phase one — ending QE — is complete. We’re moving into phase two, rate increases. Phase three will probably occur naturally as the Fed’s bond holdings mature, and may take more than five years.
When the Fed is done, I suspect the fed
By removing “patient” from its official statement, the Federal Reserve’s rate-setting body seemed to indicate it was preparing to hike the federal funds rate over the coming months.
But in their obsession with exactly when the Fed will raise rates again, Wall Street and the financial media are missing the point: It doesn’t matter whether the Fed starts raising short-term rates in June or September or even early next year.
What does matter is that the Fed is moving slowly, deliberately to end rock-bottom-low interest rates and reduce the massive holdings of government and mortgage debt it accumulated since the financial crisis.
In fact, Chairwoman Janet Yellen and other prominent Fed officials have laid out a clear path to a more “normal” monetary environment. It may take several years, and when they’re done, it will be a “new” normal, with peak rates below where they once were. But they’re well on their way.
“I think it’s the same playbook we’ve been on for some time,” said James Hamilton, an economics professor at UC San Diego, who tracks the Fed and writes the Econbrowser blog. “The Federal Reserve is trying to get back to something more normal.”
The plan, which probably began under former Fed Chair Ben Bernanke (whose last vice chair was Janet Yellen) has been, first, to phase out the central bank’s extraordinary bond buying of Treasuries and mortgage-backed securities (called quantitative easing, or QE); then, to start raising the fed funds rate again, and finally, to shrink the Fed’s bloated balance sheet after several rounds of QE.
Phase one — ending QE — is complete. We’re moving into phase two, rate increases. Phase three will probably occur naturally as the Fed’s bond holdings mature, and may take more than five years.
When the Fed is done, I suspect the fed
The Fed’s five-year plan to get back to ‘normal’
Categories: The Fed’s five-year plan to get back to ‘normal’
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