Fed sticks to the script having agreed to disagree ......

Thursday 22nd September 2016

 Fed sticks to the script having agreed to disagree ......

ref :- " Yellen Rebuffs Pressure to Hike as Fed Gives Economy Room to Run" , Bloomberg Markets

What was all the fuss about ? The most likely outcome from the Fed Open Market Committee (FOMC)  policy meeting was always no change in rates, and some mildly hawkish rhetoric suggesting a hike in December. The Fed duly obliged, and the probability of a hike by year-end is now put at 60%. The FOMC's November meeting is widely being ruled out as an opportunity to adjust policy as it falls immediately before the US Presidential election. Speaking of which, Donald Trump (known to advocate higher rates) immediately asserted that the "no change" decision betrayed a Democrat bias as a hike would be generally unpopular and therefore detrimental to the legacy of President Obama and to the ambitions of the party in power. Fed Chair Yellen merely re-iterated the Fed's total impartiality and declined to comment further on Mr Trump's mildly outrageous accusation  --  very wise, too.

Anyway, the fact that 3 of the 12 FOMC members voted against the decision not to raise rates is notable (first time since Dec 2014), but Ms Yellen played it down by stressing that all members felt a hike was on its way and the three votes against reflected a slight disagreement over timing rather than any fundamental difference of opinion. Well, she would say that of course but it may be enough to paper over the thorny and related issue of  the Fed's contradictory communications  --  until the next policy meeting is imminent, at least.

Ms Yellen did talk of risks being roughly balanced, which is now taken as the expression that denotes that a hike may be appropriate, and even said that the Fed intends to raise rates if things continue as they are and "no major risks develop". Ah, there it is ..... a get-out phrase if ever there was one. To be fair, no one could expect any central bank to guarantee any course of action come what may. For now however, Ms Yellen said that the Fed had been surprised by the fact that solid employment growth had not really translated into more inflationary pressure and that the Fed had decided on balance that they still had enough room to let the economy run.

So the result that most expected then, but judging from market reactions it looks as though there were a few that felt a hike was coming yesterday. Bonds rallying both in the US and globally, stocks higher and a weaker dollar. 

Not all are in agreement with the Fed's lack of action, but Ms Yellen makes a reasonable case. It may get a lot more difficult for her of course if she finds that "room to run" running out and inflation on the up. She may be on record as suggesting that temporary bouts of inflation above the 2% level are not overly injurious to the economy, but if the Fed gets behind the game on that front she'll find plenty who disagree with her.