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FOMC: then why raise rates? - BNP

FXStreet (Guatemala) - Analysts at BNP Paribas explained that the Fed seems to be signalling that the Fed funds target rate will certainly increase, but monetary policy will remain very accommodating.

Key Quotes:

"Using the FOMC members’ projections for the Fed funds rate and inflation, and by comparing the “apparent” real rate to the estimated medium-term level, we can see perfectly how the Fed’s monetary policy will remain accommodating. If the Fed’s inflation forecasts are as foreseen by members, monetary policy could even become more accommodating for a certain period of time, despite the rate increase.

Yet if downside risks persist, namely concerning the sustainability of growth and the probability that inflation will return to the Fed’s target, then why raise rates? According to the minutes, the FOMC members see several reasons for doing so.

First, by delaying the beginning of normalisation, they risk increasing the significance that the public gives to this date. To the contrary, the Fed is seeking to minimise the importance of this date.

Second, the reasons behind the delaying a rate increase could be misunderstood, leading some to conclude that the Fed is pessimistic about the economic cycle. If this became the predominant hypothesis, the public might begin to doubt the Fed’s confidence in its own capacity to steer inflation to meet its target. This would raise doubts about the US central bank’s credibility. Fed officials also point out that the earlier normalisation begins, the longer the period over which it could be spread, thereby limiting the risks to growth."

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