Market-based probabilities for an increase in the federal funds rate in March have increased due to more hawkish rhetoric from FOMC participants and members since the beginning of the month. New voting regional Federal Reserve Bank Presidents are, however, thought to be more dovish in their assessment of Policy.
US monetary policy needs to strike a delicate balance by taking the necessary steps to pre-empt rising inflationary pressures without inflicting too much damage on labour demand. New York Fed President Dudley believes fiscal stimulus justifies rate hikes being brought forward, although much depends on the extent to which the FOMC’s baseline economic outlook will be revised upwards in the coming months.
Fed Chair Yellen believes monetary accommodation has been greater than originally envisaged and some removal is now warranted, irrespective of any easing in fiscal policy.
Equities and bonds have traditionally struggled when economic growth has consequences for monetary policy as liquidity exits financial markets and enters into the real economy. Despite its collapse during the current expansion, the Fed will closely Monitor Money Velocity to gauge prospective inflation risks.
The continuation of benign wage inflation would confirm the prevalence of low Inflationary Expectations. Meanwhile, any future deterioration in survey-based measures of inflationary expectations, additionally confirmed by financial market measures, will provoke a hawkish policy response by the FOMC.
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