The loosest tightening in the history of the Fed

Mohamed A. El-Erian, Chief Economic Advisor, on Wednesday’s potential Fed decision.

 

The recent global financial market turmoil complicates and adds risk to the potential interest rate decision to be announced by the Federal Reserve on Wednesday. Having said that, it is unlikely to deter what would constitute the first Fed rate hike in almost ten years. In potentially making this decision, the Fed would need to adopt – and is likely to implement -- a clear communication approach that emphasizes three key elements:
 

  • This interest rate hike is the first element of what is likely to be a very shallow path that would end up constituting the “loosest tightening” in the modern history of the Fed.
  • The central bank will not follow its usual "hike at every meeting" process. Instead, the pace of the campaign will be irregular, of a stop-go variety, and highly dependent on conditions.
  • When the Fed completes the cycle, the policy rate will be below historical averages.

 

Such communication is vital, especially as financial market sentiment is challenged to adapt to the "great divergence" between the Fed's monetary policies and those of central banks elsewhere, which are likely to opt for more stimulus using unconventional measures.

Mohamed A. El-Erian, Chief Economic Advisor.
Mohamed A. El-Erian, Chief Economic Advisor.

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