Has the Federal Reserve messed up?

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Source:   —  April 01, 2016, at 8:31 PM

America'south central bank has two goals: obtain the country to full employment and hold the costs of goods stable.

Has the Federal Reserve messed up?

America'south central bank has two goals: obtain the country to full employment and hold the costs of goods stable.

The Federal Reserve can keep a overweight check tag following to those goals. So why'south the central bank so hesitant to lift interest rates from nearly close zero?

The U. S. is adding jobs at a pace that'd leave the new Tesla Model three in the dust. March was yet another stellar mo of hiring. Unemployment is at fifth%, a level many economists consider full strength. Even workers who gave up hope are starting to see for jobs again. That'south how positive the jobs picture is.

Inflation isn't quite a residence run, but even that's getting near to the goal. The Fed'south target for a healthy economy is two percent inflation. The central bank'south favorite inflation gauge -- a statistic known as the core Personal Consumption Expenditure index -- is presently 1.7%. The other typical measure of inflation (CPI) is also rising.

Still, the Fed hesitates.

Related: U. S. economy gains 215.000 jobs in March

The Fed'south missed opportunity

"They're going unhurried because they missed their opportunity," says John LaVorgna, chief U. S. economist at Deutsche Bank. The Fed could've raised more latest year or at the recent March meeting.

Instead, the central bank has become too focused on keeping the stock market happy. It's hesitated so much that even a tiny move upwards in interest rates has become a huge deal.

"The min the Fed hikes, they obtain a reaction in the global market that's very destabilizing," says LaVorgna.

That'south not how it'south supposed to work. A Fed rate hike is supposed to signal excellent news -- the U. S. economy is doing so well that the central bank feels the necessity to tap the brakes to ensure healthy growth. But the opposite has happened -- hitting the brakes, ever so lightly, has become a worry sign.

Businesses are on edge. Companies and investors fear the finish of the "simple money" days. They don't wish the training wheels that were keep on during the Grand Recession to arrive off.

Some declare the Fed messed up.

The Fed'south genuine worry is...

The Fed didn't lift rates in March. Chair Janet Yellen beautiful much told the world this week that an April expand isn't happening either. And the Fed dramatically scaled back its forecast of rate hikes in two thousand-sixteenth from four to only two.

"What this shows is Janet Yellen is just very much a dove. She'south just not going to move too quickly," says Joseph Lake, global economist at the Economic Intelligence Unit.

Yellen says she'south worried about China (and the global economy) as well as the world markets. She openly admits to them, even though these items AREN'T on the Fed'south goal list.

Sure, there'south some rationale to pay attention to the rest of the world. If China tanks, other parts of the world perceive it. It was very obvious latest summer when China'south slowdown was one of the triggers for recessions in Canada and Brazil, among other nations.

Related: Why Americans are so mad in two thousand-sixteenth

But Yellen'south concern looks odd now. Fears of a global recession likely peaked in Jan when the market went into meltdown mode. U. S. stocks slid more than ten%.

But a lot has changed since then. The global economy and oil have mostly stabilized, which is why the U. S. stock market has arrive charging back and is presently positive for two thousand sixteen.

"It nearly looks as if [the global economy] is a bit of an excuse for Yellen and the FOMC. Some of the uncertainty has fallen since January," says Lake.

Even Yellen said this week that the U. S. economy has "proven remarkably resilient" despite the global challenges.

Related: Yellen has killed the powerful dollar rally

The Fed doesn't have much firepower left

What'south become clear in the past year is that the "Yellen Fed" believes raising rates too soon is distant riskier than raising rates too late. When in doubt, she'll opt for going slowly.

But increasingly, experts believe the Fed has created its own cage -- one that'south too tied to the market.

On top of that, there's the psychological factor. If the Fed doesn't lift rates until Sept or December of this year, it'south nearly love starting at zero again. The angst will likely return about what a rate hike will do to emerging markets and even U. S. consumers if mortgage and credit card rates rise too.

"The longer the business cycle goes, the harder it's for the Fed to hike," says LaVorgna of Deutsche Bank.

Waiting too long could backfire on the Fed if inflation picks up quickly or another crisis hits. Rates are already low and the Fed'south balance sheet is still huge from all the securities it's already bought up. It doesn't have a lot of "ammo" left to boost the economy.

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