Market Outlook

The Case Against Fed Gradualism by Willem H. Buiter

After two decades of never raising policy rates by more than 25 basis points at a time, the US Federal Reserve is now confronting macroeconomic conditions that demand more robust action. If the Fed proceeds too slowly, it will jeopardize its own credibility.

NEW YORK – So far this century, the US Federal Reserve has been relentlessly gradualist about increasing the federal funds rate. Since its last 50-basis-point rate hike in May 2000, the Fed has increased its policy target (now its target range) by only 25 bps at a time. It was not always like this. After moving to rate targeting in late 1982, the Fed hiked the federal funds rate by over 1% on one occasion, by 75 bps on three other occasions, and by 50 bps on nine other occasions.

By contrast, in the run-up to the 2007-09 financial crisis, from June 2003 to June 2006, the Fed raised its policy rate from 1% to 5.25% through 17 scheduled hikes of 25 bps each. And in the latest hiking cycle, which started in December 2015, the upper limit of the Fed’s target range rose nine times by 25 bps each, taking it from 0.25% to a peak of 2.5% in December 2018.

But the Fed was not so gradualist on the way down. Starting in August 2019, the Fed headed back toward an effective lower bound of 0.25% with three 25-bps rate cuts, followed by a 50-bps rate cut at an unscheduled meeting on March 3, 2020, and by a further 100-bps cut at a second unscheduled meeting on March 15, 2020.

To continue reading, register now.


As a registered user, you can enjoy more PS content every month – for free.


Register

or


Subscribe now for unlimited access to everything PS has to offer.

Buka akaun dagangan patuh syariah anda di Weltrade.
Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button