Fed seeks cover in ‘natural’ interest rate

U.S. Fed Chair Janet Yellen testifies before Congress in November 2016
U.S. Fed Chair Janet Yellen has many reasons for wanting to avoid scrutiny while she attempts to execute a very tricky soft landing for the economy (source: dpa)
  • The U.S. economy is in good shape and markets expect monetary tightening
  • Under such conditions, the Fed’s focus on the gap between natural and market interest rates is puzzling
  • One purpose may be to deflect pressure from the Trump administration
  • The Fed may be signaling that it will not support Keynesian policies or a cheap dollar

In the summer of 2016, commentators began predicting that monetary policy in the United States would no longer aim to avoid deflation and boost growth, but instead would try to keep market interest rates close to what economists call the “natural rate of interest.” This objective was widely reported in the media and never denied by the U.S. Federal Reserve. Indeed, senior officials such as Vice Chairman Stanley Fischer have publicly expressed concern that structural changes in the economy may have caused a sustained reduction in the natural interest rate.

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