The Fed: Yellen's Parting Shot

The Fed: Yellen's Parting Shot

Outgoing Fed Chair Janet Yellen warned about excessively low inflation; Germany inched toward a governing coalition; OPEC and Russia sought a deal

“Removing policy accommodation too quickly risks leaving inflation below our target”
Fed Chair Janet Yellen on the challenges of setting interest rate policy

The Fed: Early valedictory Fed Chair Janet Yellen’s term won’t expire until February, but last week’s speech at New York University sounded like advice for her presumed successor, Fed Governor Jerome Powell. The main message was a warning about the dangers of raising the Fed’s target rate too slowly. For Yellen, the main risk is less the rate itself than the economy’s longer-term expectations for those rates – which she described as much more difficult to influence, and potentially more important to the economy than the rate itself. The Fed’s policy-making body, the Federal Open Market Committee (FOMC), will announce its next rate decision on December 13; it’s widely expected that the Fed Funds target rate will be raised another 25 basis points, to 1.5%.

Germany’s post-election challenge Rather than granting Chancellor Angela Merkel’s stated wish for new elections, Germany’s President Frank Walter Steinmeier sent the parties back to the negotiating table for another attempt to form a majority coalition.  One result: the Social Democrat (SPD) party has now decided to join the negotiations for a new government.  The SPD suffered heavy losses in the election, and initially preferred to play the role of loyal opposition to whatever coalition arose, thereby preventing the far-right AfD party from becoming the main voice of the political opposition. This change of heart increased the odds that a broader “Grand Coalition” might be the final result, despite the party’s misgivings. 

The difficulty of these negotiations appear not to be affecting economic optimism; the Ifo index, a widely-followed index of business confidence, rose notably in November, despite economists' expectations that it would remain a its previous level.

OPEC and Russia: The art of the deal Russia and OPEC are scheduled to meet this week at OPEC’s Vienna headquarters. The main topic of discussion: Russia’s interest in continuing to participate in extending the current production caps, due to expire at the end of March. Russia isn’t a member of the OPEC cartel, but its role as one of the world’s largest oil producers makes its participation in any agreement critical to success.



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