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Oct 08 2015

Blind Faith Puts Fed Further Behind the Curve

While there is finally some recognition that the Fed missed its best opportunity to start hiking rates, it was at the beginning of this year that we asked, “If not now, when?” Indeed, the start of a rate hike cycle typically implies that the economy is on a strong footing, yet growth has been slowing all year, and inflation remains stuck well below the Fed’s target. Meanwhile, if this slowdown continues, it would be a particularly inopportune time to begin raising rates.

The Fed is clearly compelled to make a case for hiking rates and, despite the broken relationship between the jobless rate and inflation, is institutionally wedded to the Phillips curve to justify rate hikes. Moreover, the Fed has blamed the weakness in inflation on transitory factors, even as inflation expectations suggest that lowflation will linger.

With the stakes rising, ECRI’s latest cyclical research delves into the durability of lowflation, and whether there is a case for the Fed to begin a rate hike cycle anytime soon.

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