With rates still low, Fed officials fret over next USA recession

Reuters

Reuters

Higher inflation has become a focal point on Wall Street amid investor concerns that wages are heating up faster than Fed policymakers anticipated.

The findings, including a recommendation for the Fed to keep a large portfolio of mostly short-term government debt, appears to lend support to the central bank's plan to continue raising rates this year and in the years ahead so that it is better prepared to address an eventual economic slowdown. A retreat below the line would be viewed as a negative sign. He said he is looking for clues if the stricter bank underwriting standards and higher commercial interest rates have helped curb market volatility, but so far he hasn't seen any.

However, minutes of that meeting indicated that Fed officials in their two days of discussions expressed the view that prospects for the global economy were brightening.

Amazon rose 1.9 percent, while tech heavyweights such as Facebook, Apple and Alphabet gained between 1 percent and 2.6 percent.

"The Fed minutes and the lead up to the March meeting could push that fourth rate hike into play as we find more about inflationary data and how the Fed is looking into that".

In conducting the research, the four economists studied surprise Fed announcements on the portfolio, the market response, and the extent to which Reuters news articles credited the central bank for the market moves.

"A five-year CD gets you 3%", he said.

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But that turned out to be a knee-jerk reaction as they have fallen significantly since then - after U.S. 10-year treasury bonds lifted to a four-year high of 2.952 per cent. Many market participants took that language, from the January FOMC meeting, to indicate a more hawkish rate stance. For example, the Fed could aim to maintain average inflation at 2 percent over some specified period, meaning that it would compensate for periods of lower inflation, as during the last six years, by allowing periods of higher inflation, thus maintaining a 2 percent average.

Benchmark 10-year U.S. Treasury notes US10YT=RR were last up 14/32 in price to yield 2.8678 percent, down from 2.917 percent late on Thursday.

A continued drop by treasury yields may generate early buying interest on Wall Street, with the ten-year yield pulling back further off the four-year closing high set on Wednesday. Mortgage finance and internet stocks led the way, with both Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) up more than 2.1%. Some see this month's succession of Fed Chair Janet Yellen by Jerome Powell as ideal timing to consider new frameworks that could help drive inflation, and rates, higher.

"We find that the Fed's balance sheet is a less reliable and effective tool than as perceived by many", concluded the paper presented at the annual monetary policy forum hosted in NY by the University of Chicago Booth School of Business.

Despite the recent market turbulence, the Fed still held that overall vulnerabilities in the US financial system remain moderate on balance.

The Fed needs to slow the economy down a bit for its own good, as so far the Fed's efforts at tightening financial conditions have not been successful, said Tony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co.

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