What is potentially more worrisome than a recession is financial instability. Fed board members don’t have much experience in financial markets, let alone fixed income markets, and rates have been very low for a long time. Low-risk investments, which are influenced by the policy rate, are systemically important. They determine how much banks lend to each other, the cost of collateral and how assets are priced. Going well above zero can shock the markets and cause major disruptions. Even if inflation drops to 4% and the Fed decides to live with that, it will mean higher interest rates, and that could be troubling for markets that, after so many years, are now built for zero rates.
This post The Fed is really just guessing about interest rates was original published at “https://www.bloombergquint.com/gadfly/the-fed-is-basically-just-guessing-about-interest-rates”