Fed: Rate increases won’t necessarily tighten financial conditions - ING

The July FOMC minutes pointed to two members expressing contrasting views on another major issue: the interpretation of easier financial conditions and what the appropriate policy response should be, notes Viraj Patel, Foreign Exchange Strategist at ING.

Key Quotes

“Though one member noted that easier financial conditions might warrant tighter monetary policy (the conventional wisdom), another floated the more avant-garde view that elevated risky asset prices were a response to markets adjusting to structurally lower neutral interest rates - a factor which the Fed cannot control.”

“This implies that in the absence of inflation, there may be little need for additional Fed rate hikes to tighten financial conditions. We tend to agree, particularly since broader US financial conditions are now clearly becoming less responsive to adjustments in the short-term policy rate. This may well be the same conclusion that Yellen articulates in the press briefing this week, which on its own shouldn't prompt any major re-pricing of Fed policy expectations.”