Comment on the Fed’s Rate Rise

It’s not about the market’s immediate reaction.

It could be about the projected future path of interest rates.

But really, it’s about:

  • establishing the credibility of the Fed’s communication,
  • convincing the public of the methodology of Fed decisions moving forward,
  • and whether or not the market can reliably depend on those decisions to derive their own decisions.

For the market to have confidence in the Fed’s decisions, the market needs to believe that the Fed can produce good  forecasts of the economy.

Yellen has mentioned that the assessment will not only take into account labour and inflation figures (obviously), but also give consideration to financial and international developments. Just a few months ago, the market was somewhat surprised when China was included as a factor.

What is less clear though, is the path of projected rates, leading to the question of what natural rate of interest is baked into the forecasts? The public would like to know.

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