For now at least, an overshoot seems optimistic.
After all, the Fed has spent most of the past 12 years unable to hit its objective on inflation, which it considers essential to a growing economy that provides enough policy room to adapt in the case of downturns. In the current cycle, prevailing low rates left the Fed with only 1.5 percentage points to cut when the coronavirus pandemic crisis hit.
Wall Street economists see a period of several years before the Fed is able to hike again.
Goldman Sachs, for instance, estimates policy “liftoff” that would come “around early 2025,” depending on the metrics the Fed wants to use. One of the questions would be how far back the Fed would want to calculate to come to an “average” that would then be used to clear the way for policy normalization once inflation took hold.
Others on Wall Street see a five-year time frame as realistic as well.
Tony Dwyer, an analyst Canaccord Genuity Capital Markets, said the Fed will combine low rates with a prolonged campaign of quantitative easing, the bond-buying program that has helped add nearly $3 trillion to the central bank balance sheet since the pandemic began.
“Our take is their statement means the Fed is going to remain historically accommodative for a very long time and the economic cycle has a very long way to go,” Dwyer said in a note. “The Fed has now publicly stated they won’t be raising rates even if inflation begins to pick up, and that a strong economy accompanied by full employment will not cause them to take preemptive action to tighten due to inflation fear.”
Dwyer sees “a zero-interest-rate policy and open-ended quantitative easing (QE) for the next five years,” as government debt piles up and the Fed is called on to underwrite trillions in stimulus spending.
Photo by ikarusmedia
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