Richard Koo, Chief economist at Nomura, suggests that the Fed’s decision to forgo a rate rise in March, coupled with the indication it intends to raise rates only twice this year, instead of four times, provided a major boost to global markets.
Key Quotes
“Investors were reassured to learn the Fed could not ignore market turbulence, something I suspect contributed greatly to the rally.
US stocks have climbed to their highs for the year since then, and equity markets in Japan and elsewhere have also rebounded.
Fed still determined to normalize monetary policy…
But once it was confirmed that markets were on the path to recovery, Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams started to suggest an April rate hike might be in order.
The fact that these remarks came out as soon as the markets regained their composure suggests that the Fed remains determined to normalize monetary policy and that the US central bank is hard at work on managing expectations of further rate hikes.
Moreover, the suggestion of a possible April rate hike indicates that even the kind of severe market turmoil experienced early in 2016 was only enough to delay a hike by one FOMC meeting, or about six weeks. In that sense, I think the markets may be underestimating the Fed’s resolve to normalize policy.
And wants to avoid falling behind curve at all costs
Why is the Fed in such a rush? The real economy in the US continues to expand and prices are rising at a rate not seen for several years. I suspect the Fed, having implemented quantitative easing, feels it must normalize monetary policy faster than a central bank that did not turn to this policy option.
If the US central bank had simply pursued traditional monetary accommodation, all it would need to do is cautiously raise interest rates once the economy started to rebound.”
(Market News Provided by FXstreet)