×
Newsmax TV & Webwww.newsmax.comFREE - In Google Play
VIEW
×
Newsmax TV & Webwww.newsmax.comFREE - On the App Store
VIEW
Tags: federal reserve | interest rates | economy
OPINION

What the Fed Will Signal on Interest Rates

Mohamed El-Erian, Bloomberg Opinion By Friday, 13 March 2015 08:09 AM EDT Current | Bio | Archive

After reacting this week to the beginning of the European Central Bank's quantitative easing program, markets are shifting their attention to the U.S. Federal Open Market Committee meetings on Tuesday and Wednesday.

Yet unlike the ECB’s QE program that is bolstering both stock and bond prices in Europe, the Fed isn't likely to send a clear signal. Instead, it will probably make markets even more aware of the contradictory influences exerted by a strong U.S. recovery and the prospect of interest rate increases by September, providing further evidence of a larger economic and monetary policy divergence between the U.S. and most other nations.

Next week, Fed officials are likely to signal a slight improvement in U.S. economic prospects. That analysis will be driven by both domestic and external factors that are net positive, though not uniformly so.

Stronger domestic growth drivers -- supported by the continued broad-based expansion in employment -- continue to be held back by sluggish wage growth, along with inadequate congressional support for structural reforms.

As for non-domestic drivers, the contractionary impact of the relentless sharp appreciation of the dollar acts as a partial offset to the reduction in drag from Europe,  as that region -- the world's largest economic bloc -- responds favorably to the combined stimulative impact of the ECB’s QE, a weaker euro and lower oil prices.

Given the overall net positive impact, the Fed is likely to continue its very gradual process of monetary-policy normalization. Having exited its QE program in October, the focus now is on signaling a very careful departure from zero percent interest rates lest these overly distort markets and heighten the risks of financial instability down the road due to inappropriate asset and resource allocations. 

To this end, Fed officials will likely tweak their forward- policy guidance next week – most probably by removing the word “patient,” which was inserted last December to replace the phrase “considerable time” in describing how the Fed plans “to normalize the stance of monetary policy.” 

The central bank then would be embarking on the next stage in a delicate balancing act. On the one hand, it would open the possibility of initiating a very gradual rate hike cycle starting this summer, possibly as early as June. On the other hand, it would wish to prevent markets from jumping the gun by immediately pricing in the higher interest rate that is likely to prevail at the end of the hiking cycle (the so-called terminal rate).

In seeking to persuade markets to focus on what is likely to be a very slow and measured journey (instead of rushing to the ultimate destination, as has been historically the case), the Fed’s “linguistic gymnastics” would evolve beyond just the removal of the “patient” language. Officials are likely to also stress the conditionality of its interest rate policy intentions, including the central bank's considerable willingness to alter course if economic prospects were to weaken.

History may well view next week’s Fed meeting as a notable step in initiating an interest rate normalization cycle. The real test remains whether this evolution will end up being part of an orderly financial process that allows the economic recovery to broaden in scope and scale.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view

© Copyright 2023 Bloomberg L.P. All Rights Reserved.


MohamedElErian
After reacting this week to the beginning of the European Central Bank's quantitative easing program, markets are shifting their attention to the U.S. Federal Open Market Committee meetings on Tuesday and Wednesday.Yet unlike the ECB's QE program that is bolstering both...
federal reserve, interest rates, economy
541
2015-09-13
Friday, 13 March 2015 08:09 AM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
 
Get Newsmax Text Alerts
TOP

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved
NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved