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Fed will likely focus on low inflation but leave rates alone

26 Juillet 2017

Although most people have a sense that the economy overall has recovered, many don't feel they have benefited from the resurgence. From a year earlier, the CPI was up 1.6 percent, the fourth month of surprising weakness.

Fed Chairwoman Janet Yellen said after the Fed's June policy meeting that recent lower inflation readings had been driven significantly by one-off drops in certain price categories, like wireless telephone services and prescription drugs.

"I think the market is much more anxious about the inflation story and was buying the Fed's initial narrative that it was transitory".

"Because the neutral rate is now quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance".

Diane Swonk, chief economist at DS Economics, said she still thinks the Fed will raise rates one more time this year — in December — but only if her forecast of a rebound in inflation comes true.

Americans might be a little fuzzy on exactly what the Federal Reserve is and why the central bank's activities matter, but many do believe it's not working as well as it should.

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Yellen didn't rule out another rate increase this year. This is meant to spur economic growth by allowing businesses to borrow cheap money to use for expansion. As unemployment has since fallen, she has overseen four interest rate hikes and aims for at least one more before the end of this year. The Fed targets 2% annual inflation as the ideal figure.

The inflation undershoot has convinced markets that the Fed is making a mistake in raising interest rates at its recent pace.

"I think that one speaks to the pocketbook effect".

The Fed has primed the market to expect it to discuss the upcoming wind down of its balance sheet, but views are varied on how much it will say. The balance sheet was built up with Fed asset purchases, or quantitative easing, during and after the Great Recession. Now, they seek to slowly unwind their positions by being a net seller of securities. Officials have been saying they plan to start this year, but haven't specified when. Only time will tell to see if it goes smoothly. "The current bull market just finished month 100". The nomination requires approval by the U.S. Senate. Those declines came even though Yellen attributed the slower rate of inflation to a range of consumer items, which along with incremental improvements in the job market, theoretically should have firmed up the consumer market during the intervening period.

Sharp dollar losses over the past few weeks will loosen monetary policy and should lead to more hawkish elements within this week's Federal Reserve policy statement, which should also help stem further short-term selling pressure on the U.S. currency.

Again, a smart TSP investor's safest bet is to remain diversified across all the TSP funds, and push his or her savings rate as high as possible to keep the portfolio growing.

Fed will likely focus on low inflation but leave rates alone