Fed: monetary policy predictions depend on fiscal policy clarity
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Fed: monetary policy predictions depend on fiscal policy clarity

Want to know how many interest rate raises to expect in 2017? So does the Federal Reserve (FED)! Central bank policy makers have recently expressed uncertainty over the U.S.’ monetary policy trajectory in 2017 because it is dependent, to some extent, on the fiscal policy of the incoming Trump administration.

When it came to making predictions over the next rates rise, Patrick Harker, Philadelphia FED president, said: “I want to get a little more data before I make that decision. My crystal ball is not that good.” Nonetheless, with the U.S. “more or less at full employment,” and inflation “on course,” Harker thinks that the economy is “robust” and can support some monetary tightening, saying: “rates have been too low, not dramatically too low.” The question, then, is not if it will happen, just when and how often.

FED Chairperson Janet Yellen has made similar public statements, describing the ignorance over president-elect Donald Trump’s choice of fiscal policy as a “cloud of uncertainty,” over the central bank.

What we do know about Trump’s economic policies is that most economists seem to regard them as a mixed bag. They like the idea (at least in the short term) of his tax cuts and infrastructural investments; but they fear his protectionist trade policies. Still, few people could criticize the showman-like president-elect for lack of confidence: Trump has pledged to grow U.S. GDP by an annual rate of 3% to 4%.  For the last five years of Obama’s administration, it’s averaged just 2%.

Charles Evans, head of the FED in Chicago, stressed that there’s no need to rush into untrustworthy predictions. Saying that the incoming administration’s economic policies had to “all materialize,” he stressed that “details matter”. Ultimately, he said: “you can afford to be patient here and see what happens.”

Disclosure
The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.



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