Bond Traders Are Too Quick to Doubt the Fed's Resolve
The turmoil in Italy is unlikely to alter the path of higher rates in the U.S.
Fed Chairman Jerome Powell is determined to keep raising interest rates.
Photographer: Andrew Harrer/Bloomberg
Bond traders in the U.S. responded to the brewing crisis in Italy by sharply reducing their forecasts for how many times the Federal Reserve will raise interest rates this year. In reality, it’s too soon to make that call. The U.S. economy is in a very different place compared with previous rounds of the European debt crisis. To be sure, Fed policy makers will be watching the European situation closely for signs of contagion, but they will be watching the U.S economy even more closely.
My baseline position on monetary policy remains unchanged, which is that the Fed is most likely to follow up on its March rate increase with another in two weeks and then another in September. At that point, its target for the federal funds rate will be in a range of 2 percent to 2.25 percent, close to the lower end of estimates of neutral. At that point, policy will become increasingly data-dependent. Absent more obvious inflationary pressures, the Fed will be wary of pushing rates much beyond neutral.