The time lag from changes in interest rates until changes in employment and inflation is approximately 18 months. Therefore, if the Fed waits for proof of sustained normalization of employment and inflation to unwind prior rate decisions, then the Fed is always late. They need to have a target interest rate which they revert towards outs…
The time lag from changes in interest rates until changes in employment and inflation is approximately 18 months. Therefore, if the Fed waits for proof of sustained normalization of employment and inflation to unwind prior rate decisions, then the Fed is always late. They need to have a target interest rate which they revert towards outside of crises, or else they whiplash markets in booms and busts.
The cyclical, categorical nature of Fed decisions results in securities markets that spend more time second guessing the Fed than forecasting operating cash flows. Perversely, this focus on the Fed makes central bankers feel more important, and thus almost as concerned about their signals to financial markets as they are about the underlying economy. They are terrified that they might have to change the direction of rate changes in the absence of a crisis, which reinforces that their tendency to reduce policy action to prolonged cutting cycles and hiking cycles.
The time lag from changes in interest rates until changes in employment and inflation is approximately 18 months. Therefore, if the Fed waits for proof of sustained normalization of employment and inflation to unwind prior rate decisions, then the Fed is always late. They need to have a target interest rate which they revert towards outside of crises, or else they whiplash markets in booms and busts.
The cyclical, categorical nature of Fed decisions results in securities markets that spend more time second guessing the Fed than forecasting operating cash flows. Perversely, this focus on the Fed makes central bankers feel more important, and thus almost as concerned about their signals to financial markets as they are about the underlying economy. They are terrified that they might have to change the direction of rate changes in the absence of a crisis, which reinforces that their tendency to reduce policy action to prolonged cutting cycles and hiking cycles.