If a rate rise happens in a market that doesn’t react does it make a sound?
Financial conditions are the way in which monetary policy is supposed to interact with the real economy, raising the cost of funding and bringing down asset prices in order to cool overheating demand, or lowering borrowing costs and boosting asset prices to fan it when it’s flagging.
But after the Federal Reserve raised interest rates for the first time in more than three years last week, financial conditions have actually loosened. For a central bank trying to bring down inflationary pressures, this is not the reaction one would have wanted or expected.
As Fed Chairman Jerome Powell put it during the press conference last week, in response to a question from Bloomberg’s Rich Miller:
