The Fed ’s Unplanned Soft Landing of 2018–19

Alan ReynoldsFederal Reserve officials spentmonths talking ‐​up their visions of a linear upward path for the overnight federal funds rate on bank reserves, but with few clues about when the increase might stop or why.But markets do not wait for the Fed to act. The policy ‐​making Federal Open Market Committee (FOMC) had done nothing until now except to raise the fed funds rate a quarter point in March. Yet they nonetheless managed to double mortgage interest rates and crash the value of bonds and stocks in retirement accounts by simply talking increasingly bold ly about what FOMC members “project” might happen to the fed funds rate in the future.There was little to learn from today ’s unsurprising half‐​point increase in the fed funds rate and a year‐​late start at undoing the QE bond‐​buying spree. That and much more was already fully capitalized in the huge fall in bond prices and rise in their yields.What matters is not what happened today but what happens next. Future interest rates and prices are deeply dependent on global markets. Future interest rates will not necessarily do what Fed officials predict or want but will instead change with this unruly world.Global bond traders were typically quick to liquidate long ‐​term investments as FOMC projections and statements pointed to faster and longer increases in short‐​term rate. Yet investors have strong incentives to look at much more information than just Federal Reserve officials’...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs