Fed’s Tighter Policy Risk in Higher Rates

More demand for safe-haven assets and low productivity growth induce the Federal Reserve to keep their rates low, according to the St. Louis Federal Reserve President, James Bullard, on Monday.

If the Federal Reserve will proceed with the rate hikes, a tighter policy would be ideal for the current economy. The goal of the federal funds would be around 1.25 and 1.5 percent and current rates still fall between this range as recommended with following a neutral rate that is kept at bay by various factors moving at a slower pace.

If rates have substantially increased without changes in the data, monetary policies would then become restrictive. There is a worry that the FOMC might go on “too fast”, added by Bullard. There must be support from the data to continue with the rate hike.   

The Federal Open Market Committee is anticipated to increase its interest rates in March meeting at least twice a year, in reference to the latest December forecast of policymakers.

Bullard is known to be the most cautious among Fed officials when talking about rate hikes while the U.S. is deemed to have a low growth following a low-inflation policy and the rate should not be too high unlike there are clear indications that the economy has changed.

The term “neutral” was discussed during the National Association of Business Economists conference following the remarks of Bullard denoting that the monetary policy is a way to determine the positivity and negativity of economic activity.

Vague as it may be, the neutral rate is sufficient for the Fed in gauging the policy rates. Authorities see the present policy rates have to continue its accommodative monetary policies while inflation is still under composure.