What's Next for Monetary Policy?
article , video 05-04-2017

What's Next for Monetary Policy?

Portfolio Manager Charlie Dreifus discusses the Fed's path to normalization, and why the central bank’s role in our economy remains important.   


What course do you expect monetary policy to take?

Charlie Dreifus: We are definitely on the journey to normalization. We have to remember we're coming from an incredibly low level of Fed funds historically, as well as a very bloated Federal Reserve balance sheet.

The Fed obviously has a dual mandate. Full employment and we're there. Inflation, we're a little shy but, you know, everyone is sort of scratching their heads, as I am also as to why wages haven't really gone up as much as they really should, given this level of employment.

What do you think happens next?

CD: So, I think what’s going to happen, the market has to moderate its expectations regarding the number and the sequencing of the further rises, but absent some catastrophic event, I believe we continue to be on the course of normalization, which is a good thing.

There's a lot of unknowns because no economy has ever been in the situation that we and other economies are post-2008. You know, there was a lot of stimulus, there was a lot of swelling of central bank balance sheets and how does this all unwind with a negative incident? We don't know.

Do you think the Fed will be as important going forward?

CD: The stimulus to the economy had to be provided by, in our case, the Fed and other countries, their central banks. So, the role of the central banks is needed and important, it should continue to be an independent one.

But the issue is the Fed doesn’t really work in a total vacuum. There are, more so in the past than currently, there are the bond vigilantes out there that, you know, can disrupt what the Fed is trying to do and the Fed currently, obviously, is on a track to raise rates.

And certainly that is easier done at the short end of the yield curve than in the long end. And we've seen that now already in terms of what the ten-year has done post the last increase by, in the Fed funds rate and post the failure of the healthcare legislation.

In fact, rates have come down and that's a market force. Market is sensing some concern about the fiscal stimulus that might be coming from governments. So, the Fed is still important.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 5, 2017 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

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