What if the Fed u-turns and raises rates this year?

livemint.com:

Subscribe to enjoy similar stories. How embarrassing would it be for the Federal Reserve to raise rates this year? Could it admit that its aggressive rate reductions last year, including a cut as recently as last month, were a mistake, and put them into reverse? Investors are starting to think about the idea.

While the chance of a hike this year is still put at zero by pricing of fed-funds futures, according to CME Group's FedWatch, it is a topic of heavy discussion. This isn't just a matter of whether the economy stays hot or whether the new tax policies prove inflationary, though both matter.

At the heart of it for investors is an important question: Are the barriers to raising rates stiffer than those to cutting? Or put another way, will the Fed need more evidence to hike than it needs to cut? History shows that the Fed likes to signal big changes far in advance, and takes time to be sure it is right before starting to raise rates. Since it started releasing post-meeting policy statements in 1994, the Fed has only once switched from cuts to hikes in less than a year.

That one time was special: It slashed rates in late 1998 because the failure of Long-Term Capital Management threatened to bring down Wall Street, and once it was obvious everything would be fine, it began raising rates again. Even then, it took seven months to change course, despite the rapid inflation of the dot-com bubble.

Still, some think the Fed has learned from its initially lackluster response to the inflation shock of 2021-22, and will move quickly if there is a threat of a resurgence. “They're not going to hint at hikes until there is a lot more data," says Ed Al-Hussainy, global interest-rate strategist at Columbia Threadneedle Investments.