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Unexpected downturn in markets puts time on Fed’s side

Andy Uhler Jan 26, 2016
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Unexpected downturn in markets puts time on Fed’s side

Andy Uhler Jan 26, 2016
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At the Federal Reserve’s first meeting since raising interest rates in December, they’re sure to talk about whether another rate hike is in the pipeline. But since then, the markets have taken a beating. The interest rate increase played its part, but it’s not like the Fed writes monetary policy in a vacuum.

Robert Keiser, a vice president of research at S&P Capital IQ, said investors also have to think about things like manufacturing and oil prices. 

“What we’re seeing is a digestive process,” he said. “It is occurring, by the way, at the same time that there are signs that the global economy may be slowing a little bit.”

David Wessel, director of the Hutchins Center on fiscal and monetary policy at the Brookings Institution, said a market downturn puts time on policy makers’ side.

“I don’t think when the Fed raised interest rates in December they had in mind triggering a ten percent decline in that the stock market around the world,” he said. “We’ve had a tightening of financial conditions. That means that the Fed could afford to go a little more gradually with its rate increases ‘cause the market is doing some of its work for it.”

Randy Kroszner, a former Federal Reserve governor and economics professor at the University of Chicago’s Booth School of Business, said the hike was about inflation, and there’s been little evidence of that so far.

“Probably for the next move we’re going to need to see some evidence of it,” he said.

After all, Federal Reserve Chair Janet Yellen maintains that rate hikes are data dependent.

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