Fed's desire to raise interest rates take real form

Economic recovery, apparently begun, and Fed officials are currently thinking about how to turn an unprecedented incentives, they pumped the economy. Ultimately, this means an increase in interest rates.

How will look like the Fed tightening cycle? When it starts? Fed officials have so far no answers to these questions, and investors would be mistaken in thinking that these answers are. The contours of the form, which could be similar cycle of increasing standards, will be more apparent to Tuesday and Wednesday, when there will be meeting officials of the Fed.

There were three conditions: firstly, it's an internal debate about policy tightening, and how to begin to inform this market, as most politicians still do not believe that the market is sufficiently strong to move towards tightening. Secondly, you should not rely on the fact that the current tightening cycle will be similar to the previous one. Third, the behavior of financial markets can play a more important role at this time.

Probably in the coming weeks, officials will begin to develop a detailed economic prospects and more specifically about how they implement the decisions that affect interest rates. Fed Vice Chairman Donald Kohn (Donald Kohn) has taken a step in that direction during a speech at the end of September, in which he pointed out how difficult it is to fill gaps for investors.

"I can not signify to you that list of factors that will contribute to exit policy," he said. "As always, our predictions are based on all available sources of information. And I can not predict how quickly we will need to increase short-term interest rates, which are now almost equal to zero, or deviate from other forms of mitigation of monetary policy, it will also depend on economic recovery and the inflation outlook. "

One obvious indicator is accountable - it is the level of unemployment, which stood at 9.8% in September. Since this is a very high rate, which means that inflation will remain very low, officials are reluctant to change. Another indicator is the inflation expectations, which remains subdued, giving the Fed room for action. The third factor - that core inflation, which slowed last year, but may need to slow further, to justify such low interest rates.

Long before the action, the Federal Reserve to warn of their intentions to investors. The first step is the avoidance of words that the low interest rates will remain at a similarly low level. The communication strategy can be agreed at a meeting this week, although it remains unclear exactly when there are changes in the wording.

"There is so high uncertainty about the first half of next year, until we feel the momentum in the first quarter - we will have no desire to do anything further," - said vice-chairman of research firm Macroeconomic Advisers LLC and a former board member of the Fed Lourents Meyer (Laurence Meyer).

Officials have not decided how quickly they will raise rates at a time when to begin the conversion. They can not say it because they do not know what it will take the form of restoration. If this process will be slow - and that rates may rise similarly.

However, there is a greater likelihood that the exit strategy will be similar to the last tightening cycle, which lasted from 2004 to 2006. At that time the Fed raised interest rates slowly, methodically, increasing the federal funds rate by a quarter 17 times in a row. Perhaps this time, they want to move faster, partly because the stakes are so far from normal values now. Polismeykery also may decide to take a pause in the process, if the economy will be just as treacherous or the unemployment rate will slow down.

"If you move a gradual manner, when necessary, you will fall behind" quite quickly tightening, "- said former Fed Governor Frederic Mishkin (Frederic Mishkin), which advocated a sharp decline in interest rates, led to the crisis, and he also claimed that one day would also dramatically raise them.

The uncertainty posed by such statements for the financial markets, may be not so bad thing in terms of some Fed officials. Slow, predictable way to increase interest rates, they went last time, gave investors a very clear sign to borrow cheap money and turn them into speculative instruments, such as in real estate. Polismeykery not want the uncertainty for the sake of uncertainty, and they are afraid to give investors an opportunity to again speculate on low interest rates.

Prices of assets may play a bigger role this time than in the past. Fed officials believed for a long time in that they can not stop the development of bubbles in assets, without causing damage to the economy. But the bubble in the real estate sector has turned their views on this issue. They are increasingly focused on movements in financial markets in the U.S. and abroad.

Although markets and grow in some parts of the world, and U.S. spending on loans fell unexpectedly sharply, officials do not think that the current situation is the place to be a soap bubble. But if the markets really start to look like "foam" or if the dollar is so weak that it would fuel inflation in import prices, this may affect the Fed's decision on when to start tightening and how aggressively.

"Some of these indicators will have weight during the decision-making," - said the chief economist at Deutsche Bank Securities Peter Hooper (Peter Hooper).

Fed's Path to Higher Interest Rates Begins to Take Shape
The Wall Street Journal
November 2