OK so it’s not exactly Goldilocks. But maybe we are seeing a post-recession version of Goldilocks – call it Goldilite. The markets must be not too hot and not too cold, but just right.
The Fed marked up its assessment of growth yesterday but made no change to its assessment of inflation. In fact recent data suggest inflation risk has gone down not up: core inflation is flat, surveyed inflation expectations have edged lower and the dollar, commodities and gold have stabilised.
If the current quarter growth spurt takes hold then the Fed will have to reposition its language on rates. But the Fed seems to think the growth trajectory over the next year or so will still be in the 3 to 3.5 per cent range albeit with ups and down.
If that is the case, with inflation data muted, the Fed can be patient in sustaining near zero interest rate support while it decomissions its other crisis-fighting tools.
With unemployment still at 10 per cent this sure will not feel like Goldilocks on main street. But it could feel like Goldilite for investors.
PS. the risk that Goldilite could fuel asset price bubbles is a wild card here. But I would expect the Fed would tighten regulatory screws before moving against asset prices with rates – so there should be plenty of advanced warning.