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Uncharted Waters: The Fed’s Uncertainty

Yellen Testifies At Joint Economic Committee Hearing On Economic OutlookYellen Testifies At Joint Economic Committee Hearing On Economic Outlook
Federal Reserve Chairman Janet Yellen testifies before a Joint Economic Committee hearing on Capitol Hill, December 3, 2015 in Washington, DC.Mark Wilson—Getty Images

Does anyone really know what’s going on in the global economy? The Fed, apparently, does not. While still expressing confidence in its economic forecast, the central bank changed its guidance for interest rates yesterday, projecting the fed funds rate will rise no further than 2.375% by the end of 2018 – rather than the 3% they projected in March. And many analysts are questioning whether the Fed is willing to raise rates even that much. “It is unclear how the FOMC will ever be able to guide the markets to expect an official rate hike since they have a pattern of never following through on their words or guideposts,” said AllianceBernstein’s Joe Carson.

The Fed’s uncertainty is driven by a dismal May jobs report and a possible Brexit vote. By the fall, the worriers will be focused on U.S. elections, or some other wayward data point. The bottom line is that we are stuck in a low interest rate world, and seem likely to remain there for the indefinite future.

The full ramifications of this adventure in monetary policy are impossible to predict. But there will be ramifications. We are in uncharted waters, and the pilot needs new glasses.

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