No Change in Policy, Opting for Status Quo
The Fed left policy unchanged at today’s meeting, a bid to buy more time before it resumes normalizing interest rates. However, three Fed Bank Presidents, George, Mester and Rosengren dissented, the largest number of dissents in many years. The Fed’s statement did seem to tee up for a rate hike in December, although this is hardly carved in stone given the Fed’s willingness to accept any sign of weak growth as sufficient to justify leaving policy unchanged.
The Fed’s statement indicated “that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress towards its objectives.” This decision to keep rates unchanged came despite the statement at Jackson Hole by Vice Chair Stan Fischer, who stated the economy was within hailing distance of the Fed’s inflation target and that the economy had reached full employment.
Three members of the FOMC, Kansas City President Esther George, Cleveland President Loretta Mester, and Boston President Eric Rosengren dissented, preferring to hike rates by 25 basis points. I find it very significant that this decision garnered three votes of dissension. The Fed prefers to operate collegially and the debate must have been intense for three members to dissent publicly. Apparently, it doesn’t take much for the Fed to find a reason to avoid hiking rates. One must infer that a vote to raise rates might have elicited a few dissents against such action, probably including Governor Lael Brainard, Governor Dan Tarullo and, perhaps one other. (Yellen, Fischer and Dudley would almost certainly have voted with the majority whichever way the majority voted.) Three members of the Fed indicated they expect zero interest rate hikes over the remainder of 2016, although Chicago President Charles Evans, a long-time dove and nonvoting member, may have been that third person.
It seems like the Fed is slowly moving towards rate hikes kicking and screaming. However, enough members favor keeping rates down as long as possible so the FOMC is having difficulty pulling the trigger. This is probably not a stable equilibrium, so the December FOMC meeting becomes a highly likely time for the Fed to implement the next 25 basis point rate hike.
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