Must-Read: Ever since the Taper Tantrum, it has seemed to me that the center of gravity of the FOMC has not had a… realistic picture of the true forward fan of possible scenarios.
Now Tim Duy sees signs that the center of the FOMC’s distribution is moving closer to mine. Of course, I still do not see the FOMC taking proper account of the asymmetries, but at least their forecast of central tendencies no longer seems as far awry to me as it had between the Taper Tantrum and, well, last month:
: Yellen Pivots Toward Saving Her Legacy: “Janet Yellen… [would] her legacy… amount to being just another central banker…
…who failed miserably in their efforts to raise interest rates back into positive territory[?] The Federal Reserve was set to follow in the footsteps of the Bank of Japan and the Riksbank, seemingly oblivious to their errors. In September… a confident Yellen declared the Fed would be different…. ANN SAPHIR…. “Are you worried… that you may never escape from this zero lower bound situation?” CHAIR YELLEN…. “I would be very surprised if that’s the case. That is not the way I see the outlook or the way the Committee sees the outlook…. That’s an extreme downside risk that in no way is near the center of my outlook.”…
Bottom Line: Rising risks to the outlook placed Yellen’s legacy in danger. If the first rate hike wasn’t a mistake, certainly follow up hikes would be. And there is no room to run; if you want to ‘normalize’ policy, Yellen needs to ensure that rates rise well above zero before the next recession hits. The incoming data suggests that means the economy needs to run hotter for longer if the Fed wants to leave the zero bound behind. Yellen is getting that message. But perhaps more than anything, the risk of deteriorating inflation expectations – the basis for the Fed’s credibility on its inflation target – signaled to Yellen that rates hike need to be put on hold. Continue to watch those survey-based measures; they could be key for the timing of the next rate hike.