Over the course of 30 months, Federal Reserve voted to hike rates 17 times,
attempting to normalize interest rates to pre-recession level. In 2017, with
key economic indicators performing well, Fed officials are considering three
increases for 2018.
Unemployment rate runs low at 4.1% as of December 2017 is expected to float
around 4% until 2020, a third below the Fed’s 6.7% target. On the production
side, GDP growth in 2017 turns out to be 2.5%, well above expectation. Trump’s
policy evidently stimulated economic growth, but it may be at a pace faster
than healthy. The economy is ready to support and in need to embrace another interest
Although rises are almost certain, Mr. Harker argued the Fed may slow
down in pace compared to previous years to accord with balance sheet
normalization and maintain inflation on target.
At the worst of recession, the Fed bought large volume of low-yield securities
to rejuvenate the economy. Successful as it was, the Fed now decides to gradually
return its excess holding to marketplace, called “balance sheet normalization”.
A relatively low interest rate promotes market activities as such.
Historically, the Fed was reluctant to raise rates when inflation runs
below 2% target, as the Fed concerns a economy lack of motivation due to soft
inflation, or worse, the slim possibility of artificially create a recession.
Since below target inflation is the case in 2017.
The article mentioned a narrowing between short- and long-dated securities
signs a slower economy in the future, which I would like to raise a different
opinion. The Fed aggressively interfered with bond market with excessive
holdings and quantitative easing(QE). It is only when Fed exits and the market
has returned to equilibrium can the indicator be taken as a truthful reflection
on the economy.
Canada’s decision from just a few days ago in raising overnight rate by
a quarter percent to 1.25% could be a communicated result with US. As we can
see from European debt crisis what can vastly different monetary policy from
tightly interdependent economies