Fed officials not aligned on weight of financial conditions
TLT•Fed officials are divided over how much loose financial conditions should influence monetary policy, as many investors expect the central bank to leave rates unchanged this week. The Fed raised its benchmark rate by a quarter point in September to a range of 3.75%-4.00%.
1. Disagreement over conditions
Fed officials are divided over whether loose financial conditions should carry more weight in deciding interest rates. Financial conditions include short- and long-term borrowing costs and stock prices, which help transmit changes in the Fed’s short-term rate to the broader economy.
2. Rates outlook
Guidance from key officials suggests a majority will support leaving the benchmark rate unchanged at the meeting concluding Wednesday, after the September increase. Investors expect a rate hike at the December 8-9 meeting. Cleveland Fed President Beth Hammack said financial conditions did not seem restrictive and likely needed to be for inflation to return to the Fed’s 2% target.
3. Mixed assessments
Goldman Sachs’ US financial conditions index had tightened somewhat since the September rate increase but remained close to its level at the start of the year. A Deutsche Bank survey found 42% of investors viewed conditions as moderately accommodative, while 15% called them restrictive. Former Philadelphia Fed President Patrick Harker described the overall state of financial conditions as closer to neutral.
