US Interest Rates
Thursday December 14 will go down in history as the day that the Walt Disney Company wrote a new chapter in the history of a once feared empire, and settled the destiny of one who was taught to wield mysterious power by a wise and wizened old master. But enough of Star Wars, Luke Skywalker and his mentor Yoda, writes Matthew Vincent. In other news, Disney is buying the entertainment assets of the 21st Century Fox empire, and deciding the destiny of James Murdoch, who had run the business for his father: the legendary media mogul Rupert.
How are central banks expected to function if the world’s smartest economists and policymakers can’t even agree on the basics?
Back in November 2013, nearing the end of his term as Fed chair, Ben Bernanke offered perhaps the clearest articulation of his views on the mechanisms through which the Fed’s distinct policies affect monetary conditions. My colleague Gavyn Davies then described the critical element in Bernanke’s speech as the separation principle, writing:
Just more than three years ago, Janet Yellen gave the Michel Camdessus lecture at the IMF, titled Monetary Policy and Financial Stability. The thrust of the speech was that “monetary policy faces significant limitations as a tool to promote financial stability”. As Yellen summarised the point then:
So what he’s saying is, the Fed will raise rates at some point and it won’t be a very long time from now. But he’s not saying it’s going to be in a week or a month or a couple of months. Right. OK.
The VIX is low… too low.
In the absence of concrete policy plans from the incoming Republican administration, and a sense of how those might play with the respective caucuses (caucusi?) in the House and Senate, the easy assumption is the Federal government will spend more on bridges and roads and/or cut taxes. But history suggests Trump can act in unpredictable ways.
We don’t really understand how changes in the level of short-term interest rates affect things we actually care about, such as growth and employment. There are too many moving parts and leaps of logic required, many of which are based on bogus assumptions about how the world works. So it’s always nice to find new research into a small piece of the monetary transmission mechanism that’s grounded in facts. Researchers at TransUnion, the credit reporting company, looked at which American consumers would be exposed to an increase in the Federal Reserve’s policy rate corridor and the dollar magnitude of the impact of different tightening paths. We recently had a chance to discuss their findings with Nidhi Verma, who led the project.