The Fed and the “Asymptotic Approach Principle”

The “principle” is well illustrated in Tim Duy´s Fed Watch:

September 2014

Bottom Line:  The baseline path for interest rates is a delayed and gradual rate hike scenario beginning mid-2015.  It seems reasonable, however, to believe that the risk is that this baseline is too dovish given the general progress toward the Fed’s goals, a point made repeatedly by Fed hawks. Internal dissension to the baseline would only intensify in the face of another six months of generally solid economic news, especially on the labor front.  Yellen would not want to risk the recovery, however, on an overly aggressive approach, especially in the face of low inflation. Considering the path of the data relative to the various policy factions with the Fed, I believe the risk is that the Fed pulls forward the date of the first rate hike as early as March – still seven months away! – while maintaining expectations for a gradual subsequent rate path.

January 2015:

If you were looking for fireworks from today’s FOMC statement, you were disappointed. Indeed, you need to work pretty hard to pull a story out of this statement. It provided little reason to believe that the Fed has shifted its view since December. A June rate hike remains the base case.

June 2015

The Federal Open Market Committee meets this week to discuss the path of monetary policy.

Any possibility of a rate hike at the meeting’s conclusion on Wednesday was already crushed under the weight of weak data early in the year. To be sure, the data support the transitory nature of the weakness, justifying Federal Reserve Chair Janet Yellen’s optimism last month, but it remains too little, too late. Instead, turn to September as the next opportunity for the first rate hike of this cycle

In a couple of months, “Tim-In” for December…

3 thoughts on “The Fed and the “Asymptotic Approach Principle”

  1. For sake of argument assume the world’s economies need very long-term QE.

    Could the world’s central bankers adapt?

    They cry like cocaine addicts in need of a fix for higher interest rates.

  2. Meanwhile, the Fed is predicting that the Fed will miss the Fed’s 2% target.

    Honestly, it would be hard to make up something so ridiculous. I am starting to think the basic problem of CBs generally is conventionalism overriding basic logic, they can’t get out of the way of their orwn normative assumptions to arrive at obvious conclusions about the proper path of monetary policy.

  3. Fala João! Quanto tempo..Espero que esteja tudo bem com você
    Legal saber desse blog.
    Um grande abraço

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