Fed Thoughts: The Moving Target That Is The Equilibrium Real Rate

At the climax of the play Peter Pan, the audience is asked to clap to revive the dispirited Tinker Bell. Only such a show of belief can save the dying fairy. Over the past few weeks, investors tried the financial market equivalent to bring life back to the flagging fortunes of Federal Reserve firming at the FOMC meeting scheduled for September 20th and 21st.  Some even talked up the possibility that the last speaker before the black-out curtain dropped, Governor Lael Brainard, would deliver a hawkish warning of imminent action.  To her credit, the governor squashed those forlorn hopes quickly with the first four words of her prepared remarks. Expecting a rate hike soon? The appropriate time horizon of monetary policy action, the governor explained, is “in the months ahead…”, not evidently next week.  1FOMC participants will have a full and frank exchange of views on Tuesday and Wednesday, release the prior meetings’ statement with a revised date at the top, and send out their chairwoman to explain at her press conference that all decisions are data dependent and made meeting by meeting.

1Available at https://www.federalreserve.gov/newsevents/speech/brainard20160912a.htm and accessed 9/13/2016.

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