Monetary Policy & Inflation | US
All eyes are on the Fed tonight and we have given our take on what to look out for. But here’s a completely different angle. What if rather than a Fed hiking cycle, we are actually in the midst of an easing cycle! Bear with me. Remember the Fed had started to cut rates in 2019. Policy rates went from 2.5% to 1.75% (upper bound of Fed funds). On top of that, the Fed had started its T-bill QE programme to deal with the repo crisis. So, going into COVID, the Fed was at the start of an easing cycle.
Then COVID hit, and the Fed had to do all sorts of crazy things: cut rates to zero, expand the balance sheet and so on. With COVID waning as a factor, the Fed is expected to hike rates, and where do markets think they will settle at? Around 1.75%, which is precisely where policy rates were before COVID, which was when the Fed was easing (Chart 1).
The question is whether markets are telling us that we are really only returning to pre-COVID policy rates, which would then allow the Fed to continue its easing cycle. The COVID policy rate cuts and hikes were simply an interruption in the Fed easing cycle that started in 2019. Food for thought!
It’s a very good way of looking at it. The C19 response took CBs well off a normal path.
Thx – yes. It’s such an unusual period, that the traditional start/end of business/Fed cycle doesn’t make as much sense.