Business Monday

Throwing shade on the Fed’s interest rate path

Federal Reserve Chair Janet Yellen. Central banking elites from around the globe and leading economic thinkers gather at the end of the week ahead for an annual symposium in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve.
Federal Reserve Chair Janet Yellen. Central banking elites from around the globe and leading economic thinkers gather at the end of the week ahead for an annual symposium in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve. AP

A week that begins with a total solar eclipse darkening skies coast to coast will end with investors hoping for fewer shadows from the Federal Reserve.

Central banking elites from around the globe and leading economic thinkers gather at the end of the week ahead for an annual symposium in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve.

The Federal Reserve has long been expected to begin unwinding its balance sheet soon. This is the practice of slowing selling off bonds the central bank bought in the years after the end of the Great Recession. The goal was to drive long-term interest rates down with the hope of kick-starting the economy.

The Fed hasn’t set a specific schedule for when and how it will embark on reducing its holdings of mortgage-backed bonds and other securities, but it will aim to do it methodically and marginally so as not to flood the bond market and risk sharply higher long-term interest rates.

While there seems to be consensus regarding reducing its $4.5 trillion stockpile of bonds, there appears to be a growing split over the Fed’s plan regarding short-term interest rates. The group has raised its target interest rate twice this year and has been expected to hike it once more. But stubbornly low inflation has seeded concerns by some insiders that the central bank is working to slow the economy at a time when it doesn’t need to be, according to minutes of the Fed’s Open Market Committee Meeting last month.

Such discussion creates shadows on what had been an otherwise-clear path.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.

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