Is Fed losing credibility over refusal to hike rates

by Ryan Smith26 Sep 2016
The Federal Reserve is going to lose its credibility if it keeps teasing rate hikes that don’t materialize, according to one economist.

Last week, Fed officials – for the second time this year – decided to forego a rate hike after spending months making a case for it. That behavior may cause the Fed to lose its credibility with the markets, according to a MarketWatch report.

“There are only so many times you can lay out the case to act and then do nothing and still expect to maintain your credibility,” Richard Moody, chief economist at Regions Financial Corp., told MarketWatch. “If not there yet, the Fed is perilously close to being there.”

The Fed left rates unchanged again on Wednesday – the last rate hike was in December – but Chairwoman Janet Yellen said one increase would be “appropriate” this year as long as no major new economic risks emerged, MarketWatch reported. While the statement is widely seen as preparation for a December rate hike, some analysts doubt it’s coming.

“(We) can’t help but think leaving a three-month window simply leaves three months for something to go wrong and preclude a December rate hike,” Moody said.

In order for a December hike to occur, the Fed would have to be able to point to a continuously strengthening labor market and other strong economic indicators.

“If that materializes, you theoretically get a hike – unless, of course, something pops up that derails them,” Tom Porcelli, chief U.S. economist at RBC Capital Markets, said according to MarketWatch. “For those with short memories, please keep in mind this Fed is easily derailed.”
 

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