17 Dec 2015
Up with the rate, Fed back in chartered waters - BNPP
FXStreet (Delhi) – Alexandra Estiot, Research Analyst at BNP Paribas, notes that the US Fed had just confirmed what was fully expected: the Fed Fund Target is raised by 25 basis points.
Key Quotes
“The decision goes beyond that. In a context of enormous excess reserves, the Fed has to use additional tools to be sure its monetary policy stance is fully implemented.”
“The interest rates paid on excess reserves, the discount rate, the cap on overnight reverse repos transactions are all raised. The Fed will closely monitor the effectiveness of all those tools.”
“Now the first hike is a done deal, FOMC members can emphasise even more credibly their expectations of a gradual path that would not drive the Fed Fund Target at its estimated equilibrium level before 2019.”
“In a way, the Fed is back in chartered waters: it has to keep the economy growing at a pace solid enough for stabilising the unemployment rate but not too fast in order not to fuel inflationary pressures. Admittedly, this time is a bit different: the growth rate has to be high enough to absorb residual under-employment and inflation has to be sped up. But the task is not fundamentally different, as it has been in a not so distant past when deflation was the main risk. It is a question of dosage, and FOMC members are willing to adapt it as they go, hence the data-dependency. May the force be with them!”
Key Quotes
“The decision goes beyond that. In a context of enormous excess reserves, the Fed has to use additional tools to be sure its monetary policy stance is fully implemented.”
“The interest rates paid on excess reserves, the discount rate, the cap on overnight reverse repos transactions are all raised. The Fed will closely monitor the effectiveness of all those tools.”
“Now the first hike is a done deal, FOMC members can emphasise even more credibly their expectations of a gradual path that would not drive the Fed Fund Target at its estimated equilibrium level before 2019.”
“In a way, the Fed is back in chartered waters: it has to keep the economy growing at a pace solid enough for stabilising the unemployment rate but not too fast in order not to fuel inflationary pressures. Admittedly, this time is a bit different: the growth rate has to be high enough to absorb residual under-employment and inflation has to be sped up. But the task is not fundamentally different, as it has been in a not so distant past when deflation was the main risk. It is a question of dosage, and FOMC members are willing to adapt it as they go, hence the data-dependency. May the force be with them!”