OutlookforMonetaryPolicy.PDF

Outlook for Monetary Policy and Exchange Rates Joseph E. Gagnon April 12, 2017 4/12/2017 Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036 1 A Slow Tightening Cycle Increase in federal funds rate from low point 6 5 s t n 4 i o p e g 3 a t n e c r 2 e P 1 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 Months of tightening after Apr 77 Mar 87 Jan 94 Jun 04 Nov 15 Sources: Haver Analytics and author’s calculations. 2 New Normal of Low Rates • Secular stagnation? • Low population growth • Retirement saving • Low productivity growth • Global saving glut/FX policies • Demand for safe assets 3 FOMC Participants’ Forecasts of Long-Run Federal Funds Rate Median = 4.25 Median = 3.00 January 2012 March 2017 Source: Federal Reserve Board. 4 Fiscal Risk to Rates and Dollar • Dave’s fiscal projection may not be fully priced in by financial markets. • Dollar appreciated 4 percent after US election. • Given back about half of those gains. • Market expectations about budget deficit may be a bit low. • Could be an upside risk for bond yields and the dollar. • Fed would have to accelerate tightening, but will not do so before budget is passed. 5