Hilsenrath: Fed Not In Agreement on Rates

Jon Hilsenrath has a piece in the WSJ saying that the members of the FOMC are not yet in agreement on the need to raise rates next week. The Fed meets again next week, on Wednesday and Thursday.

Investors see the hesitance. In futures markets, where traders make bets on the outlook for Fed policy, the market places a 74% probability on the Fed leaving its benchmark rate unchanged this month, according to the Chicago Mercantile Exchange. Futures market prices show traders see the probability of a move by December at greater than 60%.

Still, the case isn’t closed. Internal deliberations could move the Fed toward action next week. New twists in markets or economic data will shape discussions.

I’m not going to make a guess on what the Fed will do, but I would think the central bank would want a broad majority for its first rate increase in nine years.

Fed Vice Chairman Stanley Fischer sought during a central-bank conference in Jackson Hole, Wyo., late last month to push against the market’s view that a September increase had become much less likely. He and other officials have sought to keep their options open, and some advocate a move.

“I will not, and indeed cannot, tell you what decision the Fed will reach by Sept. 17,” Mr. Fischer said.

The market’s perception of what the Fed will do has changed since China devalued last month. But I strongly doubt that influenced Fed members.

If I were a voting member, I’d vote against a rate hike. As of yet, President Obama has not called for my advice.

The Fed’s decision isn’t a binary one—to act or not to act. Before every policy meeting Fed staff economists present officials with a variety of choices, typically three, including middle-ground options that navigate between Fed “hawks” who lean away from low interest-rate policies and “doves” who support easy money.

A middle-ground choice now could involve signaling more strongly the Fed’s intent to raise rates this year once officials become comfortable recent market moves aren’t a sign of deeper problems in the global economy.

“It would be reasonable, from my own perspective, to see interest rate increases sometime later this year—or an interest rate increase” if the U.S. outlook doesn’t deteriorate, Mr. Williams said.

I think the market doesn’t fully realize that the Fed could hike once or twice and then do nothing. The first increase will have the biggest impact on investor psychology. But in reality, 0.25% increases aren’t that much.

Posted by on September 9th, 2015 at 10:50 pm


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