Monetary policy

Easy monetary policy to stay

During the presidential campaign, the Fed was criticized to keep the policy rates low to help the administration at the time. At the December 2016 FOMC meeting, the Fed raised the rate by 25 percent basis, and made prediction that there could be three hikes of interest rates in 2017. I thought the hawkish prediction was simply a compromise to the newly elected administration (refer my note in Dec. 18, 2016).

The Fed was quickly back to reality at the meeting last week, with no more indication of three hikes this year. As a matter of fact, a loose monetary policy is in line with the new administration’s pro-growth economic strategy – low U. S. dollar to promote exports, and to borrow money to build infrastructure.

In the front of the Fed’s two mandates, employment has more room to improve, as indicated by the unemployment data released on last Friday. “Job gains remained solid and the unemployment rate stayed near its recent low”. However, some survey indicated that there are about a million part-time workers who want to work full time jobs.

“Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance”. The prices of energy and other commodity remain low and wage increases are moderate.

Overall I maintain my predication of two rate hikes by the Fed this year.


[1] FOMC meeting minutes Feb 1, 2017.