The Federal Reserve, like chaperones at a fraternity house party, has appeared overly concerned about the prospect of upsetting the party-goers and has backed off from earlier indications that it would raise rates four times this year, says Joe McAlinden of McAlinden Research Partners.
William McChesney Martin, the longest sitting Federal Reserve Chairperson in history, once famously quipped that it was the Fed’s job to “order the punch bowl removed just when the party” really starts to get going. His point was that the Fed should raise interest rates and restrict liquidity to preempt an overheating economy before the economy actually overheats and it is too late. The metaphor is a bit dusty as it’s been over a decade since the Fed was in a tightening mode, but the “punchbowl” reference is increasingly relevant again.
Following the first interest rate hike last December, the Fed, like chaperones at a fraternity house party, has appeared overly concerned about the prospect of upsetting the party-goers and has backed off from earlier indications that it would raise rates four times this year. In mid-March, the Fed not only passed on hiking rates but also issued its updated FOMC median projection for the year-end Fed Funds rate. The median forecast was lowered by 50 basis points, effectively signaling there will now be only two rate hikes over the course of 2016. At the April FOMC meeting the Fed remained cautious about raising rates. As things stand, rates will remain below 1% for the rest of the year.
The news was greeted by some (including me) as a total capitulation by the central bank to the more dovish views held by traders in the financial markets. It added fuel to the notion that central banks have lost control and are letting markets dictate monetary policy. Fed Chair Janet …read more