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Goldilocks has left the building

Fed first interest rate increase of 25 basis points came in March — months after inflation began to overshoot its 2 per cent target.

Real monetary conditions have in fact got easier since then.

Inflation has risen by more than the Fed funds rate, which makes America’s real interest rate even more negative than it was before.

Fed would prop up asset prices with steep rate cuts and quantitative easing. It thus always made sense for investors to “buy on the dip”. 

On the one occasion the Fed did try to alter the rules, it was quickly whipped into line. Ben Bernanke’s attempt to end quantitative easing in 2013 was shut down by the market’s “taper tantrum”.

Powell is likely to announce the first 50 basis-point increase in years. 

But with headline inflation at 8.6 per cent, a doubling of the Fed funds rate to 1 per cent is hardly disinflationary.

Edward Luce FT 3 May 2022


Några försiktiga räntehöjningar. Sedan återupptas festen


Jeremy Grantham says ‘Goldilocks’ era of past 25 years is ending


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