As widely anticipated, the Fed concluded to stand pat again coming out of today’s meeting. While this is consistent with expectations, the fact that three voting members dissented suggests a growing divide within the FOMC about the need to act. In addition, the rate projections released alongside the statement itself points to a clear majority of the committee projecting a rate hike before year-end. That puts the December meeting in focus as the mostly likely time for the Fed to hike.
Fed policymakers remain stuck in essentially the same position that they have been in for some time. Using their own characterization, they remain “data dependent”, suggesting that they are evaluating and responding to a range of information about the economy in real time. The problem is that there is an inherent inconsistency in the data that creates ambiguity and paints a picture of an economy that is, by certain measures, still lukewarm. A few good months of data is followed by some disappointment. Job creation may look solid, but wage growth is limited and the economy is still growing at a sub-par pace.
How do you raise rates when inflation is still below the long-run goal, inflation expectations are in check, and the economy grew at basically 1% in the first half of the year? Even if you’re optimistic that growth will improve, until that becomes reality, it’s difficult to make the case to tighten, particularly in the absence of an easily identifiable catalyst for stronger growth. In short, the economy doesn’t appear even close to overheating.
Conversely, the recession ended over seven years ago, and the economy is well into the current growth cycle. The Fed certainly wants to create some cushion to be able to lower rates when the next recession arrives, but don’t want to act prematurely to choke off growth.
That’s the position that the Fed has been in for some time, and it appears to still be the case today.