Mike and Co. —
A quick preview today of the week’s main event — the Fed’s decision following the FOMC meetings tomorrow and Wednesday on whether or not to maintain the federal zero interest rate policy in place since 2008. The announcement is expected Thursday. We’ll take a look at the decision and the reaction on Friday.
FRB Interest Rate Meeting Preview
Opinion and expectations among the legion Fedwatchers in Washington is split in advance of the Fed’s anxiously awaited announcement on Thursday afternoon on the questions of the hour: will the Fed end the historic zero interest policy, now in its eighth year? More importantly, will it offer indications of whether the brakes are to going to be pressed hard or softly, singly or multiple times?
The consensus view on timing has swung over last several weeks, on sudden and unexpected global volatility in the wake of the Chinese capital market plunge in one direction and in the other on a robust upward revision of second quarter U.S. GDP growth from 2.3 to 3.7 percent.
Fed Chair Yellen had made clear in public statements for months that a rate hike was likely sometime this year as the unemployment rate approached 5 percent and inflation remained at bay.
Attention was thus focused on the August jobs report on September 3 that that the U.S. economy created 173,000 jobs in August and the unemployment rate dropped to 5.1 percent.
Job growth came in slightly weaker than expected though wages rose at a healthy pace and joblessness fell to the lowest level in seven years — not weak enough on balance to force the Fed to wait, or good enough to make a September rate hike an easy call. Per Brookings Institution senior fellow and recent former Federal Reserve Vice Chairman Donald Kohn: “The jobs picture says yes. The inflation picture and some of the financial market developments say no. It’s a very close call.
This focus on the lift-off date is myopic. Kohn said he would want the Fed statement after its September meeting to stress that rates will rise before the end of the year. “That will help build in the expectation of higher rates later this year and put that in the markets, so when I finally did move it wouldn’t be such a surprise.”
The debate about the Fed’s decision has seeped into the political arena. In an increasingly vocal effort that they’ve dubbed Fed Up, activists have been lobbying lawmakers and Fed officials, including Yellen, and showed up at the Fed’s annual retreat in Jackson Hole, Wyo., wearing shirts that read, “What Recovery?” The New York Times editorial board on Labor Day came out against a rate hike on the grounds that worker pay is stagnating.
The ranking members of Senate Banking and House Financial Services, Sherrod Brown and Maxine Waters wrote to Yellen on August 13, before the unrest in the Chinese markets began to change the conventional wisdom around what the Fed would do this month. Even at that time, Brown and Waters wrote: the “costs of premature tightening far outweigh the costs of delay.” Some senior Hill Democrats who have urged caution may have a second motivation: increasing rates could dampen the economy just as the party is trying to hang onto the White House in 2016.
To be sure, there is a countervailing view among some economists and anxiety among some conservatives that the central bank has already waited too long to begin tightening the flow of credit, risking rampant inflation and threatening financial stability.
“It would be probably Pollyannaish to think that the Fed doesn’t feel pressure one way or the other – whether they act on it or not is something else,” said Rep. Bill Huizenga, chair of a House subcommittee focused on monetary policy.
Charles Geisst, an economic historian at Manhattan College said that the Fed “does not talk about politics at all, they studiously avoid it… But with the GOP all over them for disclosure on asset purchases I can’t see them doing any more of that. And they will want to raise rates well before the election so they aren’t accused of playing politics.”
Yellen and her fellow FRB members know they aren’t really being lobbied. A rate increase is not going to affect Yellen or the Board’s standing among Democrats. Most members will play to their own constituencies, less for an effect on the Fed as for an effect with constituency groups that they care about.
The real key goes beyond the initial rate hike. It’s what happens in the months and quarters after that — what the tightening cycle might look like? Does the Fed continue to raise rates at its next few meetings or does it release the valve slowly and only hike two or three times in the next years? Although the trajectory of the hike is what policy makers and markets should focus on, they probably won’t do that until the first rate hike is over.