Brocker.Org: A red flag is popping up that should make the Fed stop raising interest rates

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The Federal Reserve seems bent on raising interest rates at least
twice more this year, yet the economic data increasingly do
not support the central bank’s sudden gusto for tightening
monetary policy.

US economic growth slowed to its
weakest pace in three years during the first quarter
, while
employment gains have also lost momentum. More importantly, the
Fed has barely just reached the 2% inflation target it has been
undershooting for most of the recovery — and some economists
believe the figure is likely to slip again.

“After spending nearly five years missing to the downside
on the inflation target, the Fed finally achieved its goal as the
yoy headline PCE deflator hit 2.1% in February,” Omair Sharif,
economist at Societe Generale,
writes in a note to clients
. “Unfortunately, Fed
officials cannot take a victory lap, because they will be right
back to missing the target again when the March figures are
released.”


Societe
Generale

If the data is moving generally in the wrong direction, why are
Fed officials, including many once seen as dovish, so keen to
keep hiking interest rates?

One of the arguments market participants offer for the Fed to
tighten policy further is that, while the economy might remain a
bit shaky, financial markets have been on a tear and
record-setting stocks could use a dose of take-away-the-punch
bowl-type central bank discipline.

Indeed, Fed officials themselves have expressed concerns
about elevated asset prices
in some sectors. According to
minutes from the Fed’s March meeting “

many
participants discussed the implications of the rise in equity
prices over the past few months, with several of them citing it
as contributing to an easing of financial conditions.”

But here’s the problem with that line of thinking. There is broad
consensus at the Fed, if not total unanimity, that
interest rates are too blunt a tool to be able to target asset
bubbles

What happened to all the so-called
“macroprudential” or targeted regulatory tools
 officials
were supposed to develop and deploy? Just like pre-crisis bank
regulation, they were
never the Fed’s real focus.

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