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3 Jun 2015
How much interest rate adjustment will be needed to meet the FOMC’s objectives? – Nomura
FXStreet (Barcelona) - With uncertainty revolving around how short-term interest rates in the US are going to evolve, North American Economists at Nomura look to answer the key question regarding the amount of rate adjustment required to meet FOMC’s medium-term objective.
Key Quotes
“Current estimates suggest that stabilizing the economy at full employment – the FOMC’s key macroeconomic objective – can be achieved with only a modest increase in short-term interest rates. This suggests that we should think about the coming interest rate adjustment as involving two different phases with different economic issues. The first phase involves reducing accommodation to stabilize the economy at full employment. The second involves a deeper “normalization” of the economy that will allow, or require, the FOMC to move rates up to levels closer to those seen in previous recoveries."
“The first phase of adjustment will be dominated by the first two questions above. The FOMC’s forecasts are consistent with liftoff in September and subsequent increases at every other meeting through the end of next year.”
“At this point we think this is a reasonable modal forecast for Fed policy between now and the end of next year. We expect the FOMC to increase interest rates for the first time in September. After that, however, we see a greater likelihood of a slower adjustment than a faster one."
“Current estimates suggest that the economy can be stabilized at full employment with a real short-term interest rate of about zero. Given the Fed’s 2% target for inflation, that implies an equilibrium level of nominal fed funds rate is about 2%. Raising rates above 2% will require a more complete economic “recovery” than we have experienced to date. This seems far from certain. Therefore, we think it is appropriate to assign greater uncertainty to increases in short-term interest rates beyond 2%.”
Key Quotes
“Current estimates suggest that stabilizing the economy at full employment – the FOMC’s key macroeconomic objective – can be achieved with only a modest increase in short-term interest rates. This suggests that we should think about the coming interest rate adjustment as involving two different phases with different economic issues. The first phase involves reducing accommodation to stabilize the economy at full employment. The second involves a deeper “normalization” of the economy that will allow, or require, the FOMC to move rates up to levels closer to those seen in previous recoveries."
“The first phase of adjustment will be dominated by the first two questions above. The FOMC’s forecasts are consistent with liftoff in September and subsequent increases at every other meeting through the end of next year.”
“At this point we think this is a reasonable modal forecast for Fed policy between now and the end of next year. We expect the FOMC to increase interest rates for the first time in September. After that, however, we see a greater likelihood of a slower adjustment than a faster one."
“Current estimates suggest that the economy can be stabilized at full employment with a real short-term interest rate of about zero. Given the Fed’s 2% target for inflation, that implies an equilibrium level of nominal fed funds rate is about 2%. Raising rates above 2% will require a more complete economic “recovery” than we have experienced to date. This seems far from certain. Therefore, we think it is appropriate to assign greater uncertainty to increases in short-term interest rates beyond 2%.”