Economy

“Investors should expect the Fed’s median forecast of the longer-run (or neutral) policy rate to rise ahead,” strategists at MRB Partners said. “The implication is that Fed will ease rates less next year than what it had signaled in the September dot-plot, and what the bond market has been pricing in.”The Fed cut rates by 25 basis points in November after kicking off the rate-cut cycle in September with a jumbo 50 basis point rate cut and forecast. At the September meeting, the Fed provided projection forecasting rates to fall to 3.4% by 2025, and to 2.9% by 2026.But following a slew of positive economic data and the risk that progress against curbing inflation could be slowing, some Fed members have suggested the neutral rate — one that neither stimulus nor weighs on economic growth — could be higher and expressed cautioned on the rate-cut outlook ahead. Earlier this week, Dallas Fed President Lorie Logan acknowledged the possibility of a much higher 4.5% nominal neutral rate.”Among widely consulted models, point estimates of the neutral real interest rate currently range from 0.74 percent to 2.60 percent,” Logan said. “Adding in the 2 percent inflation target, those figures correspond to a neutral fed funds rate of 2.74 to 4.60 percent.”This is sharp contrast to the Fed’s s current estimate of the neutral rate, at 2.9%, which is “clearly too low,” the strategists said.  The “realistic estimate” of the neutral policy rate for the U.S., the strategists added, should be at least in the 4.5% range or even higher. The strategists based this on a 3% inflation target and 2% economic growth. The impact of higher neutral rate is likely to “have significant implications for U.S. Treasury yields and the shape of the yield curve,” the strategists warned. They expect yields to move higher and the curve to steepen as a result, with 10-year Treasury yield potentially moving to a 5.25% to 5.5% range. More

“We are close to an agreement: China could commit to offering e-cars in the EU at a minimum price,” Bernd Lange told n-tv, without elaborating. “This would eliminate the distortion of competition through unfair subsidies, which is why the tariffs were originally introduced.”The European Commission was not immediately available for comment.The European Union last month decided to increase tariffs on Chinese-built electric vehicles to as much as 45.3% in its highest-profile trade investigation, a move that has divided Europe and triggered retaliation from Beijing.The tariffs, which became effective on Oct. 30, were imposed to counter what it says are unfair subsidies including preferential financing and grants as well as land, batteries and raw materials at below market prices.Despite the tariffs coming into force, both sides have continued negotiations to find a solution, fuelling hopes primarily among German carmakers — which heavily depend on the Chinese market — that a trade dispute can be averted.China’s Chamber of Commerce to the EU at the time said it was profoundly disappointed by the “protectionist” and “arbitrary” EU measure. More

WASHINGTON (Reuters) -The U.S. Federal Reserve on Friday announced plans for a May 15-16 conference and public “Fed Listens” events around the country as part of a review of its long-run strategy and approach to policymaking.The so-called “framework review,” the second of what are now intended as regular five-year analyses of the U.S. central bank’s overarching approach to monetary policy, will kick off with discussions among policymakers beginning in January, but look outside the institution as well through the conference and the community events.”We are open to new ideas and critical feedback and will take onboard lessons from the last five years and adapt our approach where appropriate to best serve the American people, to whom we are accountable,” Fed Chair Jerome Powell said in a statement.Notably the statement said the Fed’s 2% inflation goal “will not be a focus of the review,” a likely disappointment to some in academic and policy analysis circles who feel the specification of a target, and the level at which it is set, have become problems for the central bank.After a similar review in 2019 the Fed revised its framework in 2020 to put more emphasis on its employment goals, and to allow a period of high inflation to offset times when inflation was too low, as it had been for much of the 2010s and until the COVID pandemic.Some have blamed that approach, and the way the Fed applied it, as slowing the central bank’s response to inflation as prices began to accelerate in 2021.In comments at a Dallas Fed event on Nov. 14, Powell laid out a core question the review will need to answer: Whether the experience of the last few years, with high inflation and interest rates, means the central bank should return to a more traditional form of policymaking that puts more emphasis on keeping inflation contained and is concerned less about the problems that come from a low-inflation, low-rate environment.”Shouldn’t we change the framework to reflect interest rates are higher now, so that some of the changes we made are probably not necessary, or, in any case, shouldn’t be the base case anymore?” Powell said. “The base case should be more like a traditional reaction function, where you don’t promise an overshoot, you just target inflation. We haven’t made any decisions, but those are the questions we’ll be asking.”For much of the 2010s the Fed’s benchmark policy rate was pinned near the zero level, yet despite those very loose financial conditions inflation was mired below the target. It was a vexing situation for the Fed, and one that led to concern the U.S. had entered an era of prolonged economic stagnation.The framework approved in 2020 was oriented around that set of circumstances, focused on how to react when inflation was too low and putting more priority on trying to keep employment elevated since high inflation was not seen as much of a risk.Other issues that may be discussed, and that former Fed officials and others have begun to mull, is how the central bank can best communicate its policy plans, and whether it should or should not make promises about future interest rate decisions. Strictly worded “forward guidance,” pledging to keep interest rates at zero until the job market recovered from the pandemic recession, arguably kept the Fed from responding as fast as it might have otherwise done to rising inflation in 2021. More

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$1 for 4 weeksThen $75 per month. Complete digital access to quality FT journalism. Cancel anytime during your trial.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More

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