MACROECONOMICS
disinflationary forces, emanating from globalization and technological advances are benign. Officials should accept greater
deviation In
the meantime, Bario argues central banks should put more weight on financial s t ab il it y . I r on i ca l l y , and Davies sees this, the i m me d ia t e p o l i c y p r e s c r i p t i o n of Yellen and Bario is the same. Continue to raise rates gradually.
In fairness, placing in
recent speeches and FOMC minutes, it seemed to us that the Fed’s leadership was
more emphasis
on financial conditions. The FOMC upgraded its concern about asset prices in July. However, at the last press conference, Yellen’s defense of the financial
stability mandate was not as robust as it had been.
Once again, he suggested it was possible, and again the markets ran with it, driving up UK rates and sterling. In contrast, the Fed said that it might raise rates three times next year, and the market yawned. Oh, it moved to upgrade the risks of a December hike. The December 2018 contract implies a 1.50%
from their
point targets of inflation and allow greater time to reach the targets.
It was somewhat disappointing.
We are struck by the fact that BOE Governor Carney has since he took the job hinted at the need to raise rates nearly every year but last year when they were cut.
FX
effective Fed funds rate then. The effective average now is 1.16%. A December 2017 hike should bring the effective rate to 1.41%.
In early phases of the recovery, we were
skeptical
of claims that the Fed lost credibility, but now it seems palpable. Te Fed, in effect, has said, that in its
judgment,
the US economy needs less accommodation. Investors have voted with their pocke tbooks , and by driving dollar
and
Claudio Borio offers a clear and compelling explanation: Globalization
interest rates lower and equities higher, they
have
eased financial c o nd it io n s .
There is a tension here that if the Fed were to fold its cards and capitulate to the market’s judgment, it would be more difficult to rebuild that credibility.
Marc Chandler
Global head of currency strategy at BBH Brown Brothers Harriman
FX TRADER MAGAZINE October - December 2017 15
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