Jun 24, 2016 | Investment Advice

International News (Issue 405) – 24 June 2016

International News – 24 June 2016

Janet Yellen presented the Federal Reserve’s semi-annual monetary policy report to Congress during the week and reiterated the importance of the Feds cautious approach to adjusting monetary policy going forward.

Despite further progress made toward achieving the Feds objective of maximum employment, inflation has continued to run at below the 2% objective and the slowdown in the labour market (in April and May the average pace of job gains slowed to 80,000 per month) has provided further validation for the cautionary approach.

With regards to inflation, overall consumer prices increased just 1% over the last 12 months ending well below the committee’s desired target.

Much of this shortfall continues to reflect earlier declines in energy prices and lower prices for imports. Core inflation which excludes energy and food prices has been running close to 1.5%.

Bear in mind that the federal funds rate is still near its effective lower bound. There is little scope for the Fed to reduce rates should inflation remain low or should the labour market weaken further.

On the contrary, if economy was to overheat and if inflation appeared likely to move towards or beyond the 2% target range, the Fed has the ability to increase the target range for the federal funds rate.

It is evident from the report that the Fed are opting to take an overly cautious approach here and prefer to be reactive and substantiated rather than proactive and possibly move too soon.

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