Did the Fed Make a Big Mistake?

Matt O’Brien in The Washington Post: “Markets sure seem to think that the Federal Reserve has made a big mistake.”

“It hasn’t just been stocks selling off 10 percent to start the year. It has also been bonds saying that they don’t think the Fed will come close to hitting its target of 2 percent annual inflation anytime in the next 10 years. Markets, in other words, have done everything short of holding a boom box outside of Fed Chair Janet Yellen’s window to beg her not to raise interest rates any more after the Fed hiked them in December for the first time in nearly a decade. And it just might work. After all, there’s no such thing as an atheist in a foxhole or an inflation hawk in a stock market crash, especially when prices were barely rising to begin with.”

“The fact, then, that the S&P 500 seems to be saying that the recovery is falling apart should make even the most committed inflation-fighter wonder whether there is actually anything to fight.”

“So will the economy fall into recession? On the one hand, it’s hard to see how the economy could be heading that way when it’s been adding an average of 284,000 jobs the last three months … On the other hand, though, things still seem fragile enough that it wouldn’t take a lot of bad news to turn our slow-and-steady recovery into none at all.”

Ylan Q. Mui: “Central banking is a long game. The Fed’s decisions take months — even years — to influence the economy. That’s why officials insist that they do not react to every hiccup in the markets. In a speech about a week ago, New York Fed President William C. Dudley said his outlook for the economy ‘has not changed much’ despite the volatility on Wall Street. Though some data have been weaker than anticipated, the job market has been stronger, he said.”

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