The important news inside the minutes from the Oct 27-28 FOMC meeting is a bit of “inside baseball” -- what real interest rate should determine nominal policy rates. This is the critical debate, and getting it wrong, that is projecting out too high of a nominal rate too soon, even if these rates are low relative to historic benchmarks, raises “concern that the beginning of policy normalization might be associated with an unwarranted tightening of financial conditions.” The reaction of the capital markets in the past 18 months provides some guide to how even modest increases in forward nominal yields can adversely affect markets.
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