Opinion: There’s an interesting tension between the US Federal Reserve’s more positive views of the recovery in the US economy and the quite pessimistic expectations embedded in its projection of US interest rates | Stephen Bartholomeusz
There’s an interesting tension between the US Federal Reserve’s more positive views of the recovery in the US economy and the quite pessimistic expectations embedded in its projection of US interest rates.
As Victorians have experienced and Europeans can now attest to, the potential for sudden and violent outbreaks of the virus is real and has very damaging economic and social consequences. The “lower for longer” projections for US interest rates embodied in its statement fit within the new US monetary policy framework the Fed unveiled last month under which it will seek to generate, rather than contain, inflation. What had been a 2 per cent ceiling on inflation will become an average over time as the Fed tries to facilitate stronger economic growth.
Presumably, the markets had already priced in the scenario that has now been given flesh by the Fed, which raises the question of whether the momentum that has propelled the market’s surge since March, when the Fed’s slashing of rates and its reignition of the quantitative easing it employed in response to the financial crisis saw a dramatic turnaround in sharemarkets, will be sustained.
The absence of a more enthusiastic response to the stronger growth outlook and “lower for longer” rate outlook might also have been because those investors saw, and were confused by, the conflict between the projections.
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