EUR 45.60 For Business Accounts Only

The Fed's New Conundrum

​The July FOMC proved to be unremarkable as the Fed doubled down on plans to launch its bond runofff program in September.  Looking forward, a rate hike in December remains an open question given the divergent views on the Committee around both inflation and the need for further rate hikes.

From our perspective, markets may be underestimating the Fed’s determination to raise rates later this year. One source of this resolve is the Fed’s “New Conundrum”.  That is, the relentless easing of financial conditions 18 months after rate liftoff.  This disconnect between Fed policy and borrowing rates certainly weighs on the minds of FOMC members and provides a secondary rationale for further rate hikes despite the decline in inflation.  It also may explain the FOMC’s urgency to begin their bond runoff program sooner rather than later - hiking rates alone has not impacted credit conditions as they would like.