The Federal Reserve Loses Its Nerve

President Trump is right: The Federal Reserve is a big problemThe twelve Federal Reserves

The recent disclosure of the April FOMC minutes has come as a shock. Investors expected a cautious wait-and-see stance by the Federal Reserve at that meeting. But now we discover that a majority of its members openly supported a rate hike at the June gathering, should macro-economic delivery prove reasonably upbeat. No-one understands why the Federal Reserve should make such a direct commitment to taking action on a fixed date. It might well end up implementing the wrong decision just to avoid losing face. The markets have not forgotten the flawed promise Janet Yellen made to raise rates last year. She was forced to execute an ill-timed move in December, adding to confusion and volatility.

A similar mishandling of monetary policy could happen again. Should the rate hike fail to materialise mid-June, the markets might discount a worse than expected outlook, exerting downward pressure on confidence. Should the FOMC act for the sole purpose of asserting its authority, this ungrounded credit tightening might bring dire consequences. One wonders why on earth the Federal Reserve has cornered itself in such an uncomfortable position.

The answer might lie in the widespread feeling that the market considers its policy to be far more accommodative than its members would acknowledge. So their bold announcement could be aimed at dashing expectations by sweeping the market off its feet. But the shot could well backfire. No seasoned central banker would set a precise date in advance for such a key move as a rate hike. The Federal Reserve seems to be losing its nerve as it fails to make a smooth switch from the cheap money policy it enforced for so many years.


About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.