“The Great Excuse”

For the past five years the economy has been depressingly boring. But we have to understand that FOMC members must feel that by keeping interest rates at “zero” for more than 6 years, they have not been doing any “work”. As such they are restless and “trigger happy”.

Some pointers:

US Federal Reserve Chair Janet Yellen’s premium on consensus may lead to a Fed decision she has not yet endorsed, as a near-majority aligns in favor of a possible June interest rate hike.

Seven of the Fed’s 17 members have now said that they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation would turn higher.

By contrast, there is a dwindling core of officials who say publicly that the US economy and labor markets in particular still have a long way to go — just four Fed members have in recent weeks clearly said that rate hikes would not be appropriate until much later in the year or even into next year.

The five members of the Fed’s Washington-based board of governors, including Yellen, have spoken less definitively, although governors including Jerome Powell have said that they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed’s 10-member policy setting committee, but all participate in policy discussions.

Tim Duy´s “Bottom Line:

“Patient” is out. Tough to justify with unemployment at the top of the Fed’s central estimates of NAIRU. Pressure to begin hiking rates will intensify as unemployment heads lower. The inflation bar will fall, and Fed officials will increasingly look for reasons to hike rates rather than reasons to delay. They may not want to admit it, but I suspect one of those reasons will be fear of financial instability in the absence of tighter policy. June is in play.

And this is what they have faced ever since the economy came out of the throes of the “Great Recession” five years ago:

Great Excuse

What´s behaving “differently”? Clearly the unemployment rate, so that becomes the “compass”. It suits Yellen, a devotee of the Phillips Curve and its NAIRU variant!

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