For many Americans, it is a semi-holiday week. A moment of calm following the shocks resulting from Brexit. Indeed, the risks arising from the United Kingdom’s process of disconnecting from the European Union are not only felt in Europe. In fact, according to what we are hearing from several Fed governors, they are likely significant enough to make it difficult for the rate normalization process to move forward… in the short term. As you know, the market is not discounting any new official interest rate hikes before the middle of next year.
And by then, we shall see. Official interest rates at half a point for an economy growing at nominal rates above 4.5%. Naturally, the situation warrants it. And here we can introduce a whole set of domestic and international factors. Among the former are the low inflation outlooks. Using 10-year inflation breakevens, we would be talking about 1.4%, below the 2% target and with recent declines.
On the other hand, under the maxim that the markets are always right, the yield on the 10-year bond has fallen in recent days to 1.45%. Ultimately, there is no rush to raise official interest rates. And given the difficult (disturbing, I have heard) international context, there is no point in forcing a hike either. But you know what? Using different words but not-so-different arguments, we have been talking about this for almost two years. And always with the same conclusion: the time to continue raising interest rates never quite arrives. This is despite the general admission that expansionary monetary policy is too loose in the United States.
