US central bank & Federal Reserve Bank Investment Policy Impact Case Study
US central bank & Federal Reserve Bank Investment Policy Impact Case Study
Federal Reserve Bank of Minneapolis President Neel Kashkari reiterated Thursday his view that the US central bank raised rates too early in the expansion and has caused inflation to be lower than it might have been, and engineered what was likely too slow a recovery in the job market.“Monetary policy has been too tight in this recovery” with unfortunate economic results, and this “directly saps the Fed’s ability to respond to a future downturn,” Mr. Kashkari said in the text of a speech to be presented in Santa Barbara, Calif.Mr. Kashkari, who isn’t currently a voting member of the rate-setting Federal Open Market Committee, has long been a critic of the Fed’s campaign to raise rates from late 2015 through 2018. The Fed boosted its overnight short-term rate target from near-zero levels to its current range of between 2.25% and 2.50% in a bid to bring short-term rates back toward more normal levels.But as it increased rates, it did so even as inflation fell short of the Fed’s 2% target. Fed officials were confident that a strong job market would produce inflation, but that hasn’t happened.And now, the Fed, which has never sustainably hit its 2% goal since adopting it, is seeing price pressures fall further below the target as inflation expectations soften. Weak price pressures are one key reason why the Fed isn’t planning to raise rates again this year, but some observers now believe the central bank will have to lower rates in a bid to push inflation back toward the target.In boosting rates, Fed officials “misread the labor market, thinking we were at maximum employment when, in fact, millions of Americans still wanted to work, and fearing that if we hit maximum employment, inflation might suddenly accelerate, and we would then have to raise rates quickly to contain it,” Mr. Kashkari said. “Raising rates while inflation was low is an example of a shortcoming of how we implemented our framework rather than a shortcoming of the framework itself.Mr. Kashkari’s comments came in a speech that discussed his views on whether or not the central bank needs to change its framework to deal with a changing economic environment. Mr. Kashkari said he was skeptical about the need to change systems, in part because the Fed has failed to follow its current framework. He reiterated that Fed policy actions have signaled to the markets that officials see the 2% target as a line not to be crossed, rather than a point at which inflation should hover around. Put another way, inflation under target means inflation can go over target, too, without it being a major issue, but the Fed hasn’t acted that way.“If we felt compelled to raise rates when inflation was below target in this recovery, would we really keep rates low when inflation is above target next time? Count me as skeptical,” Mr. Kashkari said. The official also said it appears the Fed has caused inflation expectations to weaken.“Inflation expectations today appear to be anchored below our target at around 1.7%,” he said, adding “while that might seem like a small miss, it means that in the next downturn, we will have less room to respond because real interest rates, net of inflation, ultimately drive economic activity.”
questions
1- why is this article relevant? Articulate the reasons for relevancy.
2- what is the impact of the relationship to the investment policy of the firm and individual investor?
