Will big jumps in measures of financial volatility convince Federal Reserve chairman Jerome Powell to change tack on rates and inflation?
| After last month’s Federal Reserve interest rate decision, chairman Jerome Powell found himself being misinterpreted by financial markets asPowell had been asked whether he was concerned about easy financial conditions, and he responded by saying he thought they were tightening, hinting that market bulls were probably being a bit unrealistic about how quickly the Fed would pull back on rate rises.
The index is meant to be a leading indicator of what commercial bank lending officers are doing, what their credit policies are, and right now following theit is saying that people are nervous and pulling back on extending loans.This is the lag effect of tighter monetary policy working its way through the system like a boaconstrictor digesting a small animal.
“What the Fed can’t get away from is looking at the key variables related to their dual mandate, which are the unemployment rate and inflation data.”If anything they were marginally bearish with core inflation, which excludes food and energy, up 0.5 per cent in February, topping consensus expectations. Supercore inflation, which excludes food energy and shelter costs such as rent, was up 0.2 per cent.
“I think one of the Fed’s concerns is about the fact that their mandate is based on indicators that are lagging indicators. That makes it easy to do a policy mistake if you’re focusing on lagging indicators, and miss the fact that forward-looking indicators are suggesting things will be deteriorating rapidly.”
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