Inside the Fed's 'Hall of Mirrors' Problem

Written by Staff Writer

fuzzy mirrorssmInside the Fed's 'hall of mirrors' problem - CNN Business
"The Federal Reserve has allowed itself to get backed into a corner by Wall Street. That means the central bank may need to slash interest rates - even if it doesn't want to. Markets believe a rate cut later this month is a slam dunk, and the Fed has done little to push back against that thinking. Keeping rates steady would create a market shock — one that could infect the real economy by denting confidence.

'We're in an environment where confidence is weak. This isn't a good time to be shocking the markets,' Ethan Harris, head of global economics at Bank of America Merrill Lynch, told CNN Business....'It is a big mistake for the Fed not to push back against the markets,' Harris said. Central banks are supposed to set policy for markets, not the other way around. It's never a good idea to let the inmates run the asylum....Bank of America's Harris urged Fed chief Jerome Powell to use his appearance on Wednesday and Thursday before lawmakers as an opportunity to reset market expectations. 'Neutral testimony from the Fed that doesn't address this mispricing would be a policy mistake,' Harris said. 'If they go into the meeting with the market fully convinced they will cut, they will only have bad choices.' For now, most market observers are betting the Fed will accede to Wall Street's calls for lower rates."