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Thoughts from the Trading Trenches June, 2015

18 Years ago | June 01, 2015 6/6/23, 12:00 AM

In the June Issue

My Trading Evaluator - Join our Beta Test Now; Timing of a Fed Rate Hike; Video: Forex Trading Outlook for June 2015



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- Timing For a Fed Rate Hike

 John M. Bland

Fed Wants To Normalize Policy
I am of the school of thought that the Fed would like to hike interest rates as soon as possible. There seems to be a fear at he Board that excessive monetary ease has gone on for too long and there could be adverse consequences down the road if they do not get policy back into a more normal posture. The problem is that the economy has been extremely slow to bounce back from "The Great Recession". I think this is because the economy is facing strong structural headwinds. Monetary policy is better suited to cyclical swings in the economy rather than structural issues. The big problem that the U.S. has been facing has been a political deadlock in Washington, where BOTH political parties for their perceived advantage prefer to keep the other party from accomplishing anything rather than moving ahead with structural reforms that both can agree to.

Imperfect Tools
So the Fed is working with imperfect tools at best and pursuing a monetary policy that amounts to pushing on a string. In addition to employment, they have been targeting inflation and wage rates, but neither of the latter two items have been responding to the stimulus.

Policy Normalization
So the Fed would like to "normalize policy" as soon as possible, but the Board lacks the pretext for such a policy change. Most governors have been repeating the mantra that policy is "data-dependent". My guess is that they would be pleased with a single +25bp increase in the Fed Funds target to 0.25%-0.50% from the current 0.00%-0.25% target range, just to say they have done it. My best guess is the earliest they will hike is in September. but I lean more heavily to yearend or early-2016 in terms of timing. Dare I say it? The decision is both political and data-dependent. The Fed's greatest fear is that it might could spook the financial markets and trigger a major stock market correction. All the while, expect the Central Bank to assure everyone that "policy normalization" will be a gradual process.

John Bland is a co-founder of

- Video: Forex Trading Outlook for June, 2015


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