Why the Fed Is Hard to Predict

CAMBRIDGE – One might think that predicting the US Federal Reserve’s next policy moves would become easier now that it has already hiked interest rates ten consecutive times, for a total of five percentage points. Not so fast: I suspect that few, if any know for sure what the Fed will do at its June 13-14 meeting – not even the Fed itself.

Over the past two weeks, officials at the world’s most powerful and influential central bank have signaled a range of possible actions, from hiking rates again to “pausing” or “skipping” this round and resuming the tightening process in July. One Fed official has even hinted that it would have been better for the institution not to hike at its last meeting, in May.

We do not know where the Fed will land for two main reasons. It is a central bank that is excessively data-dependent in an unusually fluid economy; and it lacks a solid strategic foundation.

For this Fed, much will depend on the employment and inflation data that will be released in the days before the policy-setting Federal Open Market Committee (FOMC) meets. As matters stand (in late May), the data will probably lead them to hike rates again. That is not what I would do, given what I believe should be a more secular and strategic approach to monetary policy.

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© Project Syndicate

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