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The minutes of the Federal Open Market Committee’s October meeting offered a surprise… A reading of these minutes both confirmed that this committee expects it will hike in December and that the members clearly wanted to send that message. The surprise was the revelation that the Fed’s staff of Ph.D. economists has done an exhaustive study of the “neutral” real policy rate and the study concluded that 1) the neutral policy rate is time varying, 2) it is about 0% right now, 3) it is expected to rise only “gradually” over time and 4) it is unlikely to rise to levels seen before the financial crisis. Moreover, while this was a staff study, a “number of participants” at the October FOMC meeting agreed with these conclusions. So it has taken 18 months, but the minutes released today make clear that the Fed has now converged to PIMCO’s view that monetary policy will be operating according to a new paradigm for the neutral policy rate for at least the next three to five years. (source: Pimco) (VIEW LINK)


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