OP-ED: US: Understanding the Fed’s dovish turn By Nouriel Roubini
The US Federal Reserve surprised markets recently with a large and unexpected policy change. When the Federal Open Market Committee met in December 2018, it hiked the Fed’s policy rate to 2.25%-2.5%, and signalled that it would raise the benchmark rate another three times, to 3%-3.25%, before stopping. It also signalled that it would continue to unwind its balance sheet of Treasury bonds and mortgage-backed securities indefinitely, by up to $50-billion a month.
Third, US President Donald Trump’s trade wars and slowing growth in Europe, China, Japan, and emerging markets have raised concerns about the United States’ own growth prospects, particularly after the protracted federal government shutdown with which the US met the New Year. The addition of Clarida amid stalling inflation and tightening financial conditions no doubt proved decisive in the Fed’s decision to hit the pause button. But Clarida also seems to have pushed the Fed toward renewed dovishness in more subtle ways.
Finally, Clarida is spearheading an internal strategy review to determine whether the Fed should start making up for below-target inflation during recessions and slow recoveries by allowing for above-target inflation during expansionary periods. And though the review is still in its early stages, the Fed already seems to have embraced the idea that inflation should be allowed to exceed 2% without immediately triggering a tightening.
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