Why the Fed is likely to raise rates, despite low inflation

CREDIBILITY is a thing you have to worry about with toddlers. You cannot reason with them. The best you can hope to do is respond consistently to undesirable behaviour. Get this wrong and your work becomes harder. If your correspondent doesn’t actually go and hide the box of Legos every time he has to count to three, for example, his child will not find his threats to be credible, and will fail to respond to them. 

This is the problem the Federal Reserve has now with financial markets. For six months the Federal Open Market Committee (FOMC) has been carefully managing its speeches, meeting minutes and economic projections to one end: convince debt markets that it will raise the benchmark interest rate by a quarter of a percentage point at its June meeting. It has succeeded. FedWatch, a tool that estimates how markets think monetary policy will go, pegs the probability of a June rate hike at 91%. This leaves the committee with a familiar…Continue reading

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