As widely expected, the US Federal Reserve left benchmark interest rates unchanged on Wednesday.
But in memory of a time when steady interest rates were far from a given, here, courtesy of Manoj Pradhan and colleagues at Morgan Stanley, is the Fed’s record on rate increases as we have come out of the past three recessions mapped against the market’s inflation expectations at the time.
They look very much related:
And here’s where we are now – or at least where we were before Wednesday’s FOMC statement:
MOST are in the rather crowded camp that reckons the singled biggest risk to medium-term growth lies with a possible policy mistake. The danger, they say, is that stronger-than-expected growth over coming quarters encourages a rise in inflation expectations, which in turn prompts premature action by the Fed.
MOST’s analysts point out that in the past the Fed has tended to ignore early evidence of a recovery in growth and/or improvements in sentiment readings; it tends to wait a full year for evidence that recovery is for real before tightening:
One reason for this is that the early part of the recovery is usually based on this policy stimulus. A further reason is that disinflation usually continues well into the early recovery phase. Policy-makers ideally start withdrawing stimulus only when growth is self-sustaining and inflation looks poised to increase. This time is no different in that regard.
What is different is the fact that GDP and sentiment are only now showing signs of improvement because of massive stimulus — leaving the Fed and other central banks trying to find the delicate balance between waiting for a self-sustained recovery while all the time risking stocking an (even bigger) asset price bubble.
What fun.