Fed: Shifting perspective on the economy – RBC CM

Elsa Lignos, Senior Currency Strategist at RBC Capital Markets, notes that the former Fed Chair Bernanke published a new piece for Brookings in which he discusses “The Fed’s shifting perspective on the economy and its implications for monetary policy.”

Key Quotes

“His argument is that while “market commentary on FOMC decisions typically focuses on short run factors, such as the uncertainty created by [the UK referendum],” such factors affect only the “timing” of decisions. There is a deeper shift going on within the FOMC, as demonstrated by the Committee’s falling estimates of y* (potential output growth), u* (the natural unemployment rate), and r* (terminal Fed funds rate).

He argues that the two changes “most important in pushing the FOMC in a dovish direction” are downward revisions in estimates of r* and u*. As a result, “rate hikes are seen as less urgent even by those participants included to be hawkish.” The market is already well ahead of the FOMC on this (only half-priced for a hike this year—it would mean barely one hike every 18 months).”