Monday, September 28, 2015

No less than three FOMC speakers yesterday | … but you still pays your money and you still takes your choice

Something is definitely afoot at the Federal Open Market Committee (FOMC) in the US, the body that has the responsibility to raise or not raise interest rates in what is still the world’s largest economy. Last week we had the chair of the Fed, Janet Yellen, letting us know that in her assessment rates will indeed start to rise before the end of 2015.

It would now appear that the management of expectations has begun in earnest, because no less than three members of the committee were on stage yesterday, at various venues, to give us their opinions on the state of the economy and how it might impact monetary policy. They were Fed Evans (Chicago), Fed Williams (San Francisco) and Fed Dudley (New York).

In various ways, they also promoted the idea that a raising cycle is now due sooner rather than later, even if it would seem that there is not yet absolute consensus on the matter.

You pays your money and you takes your choice

Charles Evans actually sees a substantial cost to a ‘premature rate liftoff’ and he represents a considerable contrarian view to the other FOMC members we have heard from, including Yellen. The case for starting to raise rates around now is that to do so will forestall rising inflation which, for those who are old enough to remember when rapidly rising prices were the order of the day, can quickly get out of hand and become rampant. Evens is not afraid of this. He said yesterday that there he does not see ‘inflation headwinds easing until mid-2016’, and in any event would not be worried to see the Consumer Price Index (CPI) ‘moderately overshooting 2%’.

The other two speakers yesterday appear to follow what is now the more orthodox line. Williams sees monetary policy in the US ‘beginning to normalise this year’, while Dudley said that the Fed remains on track for a likely rate rise this year, and that the US could reach its inflation target next year.

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