A James Alexander post
Jon Hilsenrath at the Wall Street Journal is an excellent journalist. He often scoops his peers by getting people to talk to him off the record. His main line is into anonymous Fed staffers in Washington – aka the Fedborg.
The Fedborg is the consensus of backoffice staff who have tirelessly argued for “normalization” of monetary policy, i.e. raising rates to historical norms despite massive evidence that inflation and nominal growth are miles below healthy historical norms. The Fedborg seems to believe that preservation of financial stability is more important than prosperity. The fact that time and again this elevation of financial stability over prosperity leads to financial instability seems to keep eluding them.
Hilsenrath’s story “Fed Officials Gain Confidence They Can Raise Rates This Year“ in today’s WSJ probably moved markets. The yield curve shifted up a handful of basis points and the USD rose too – the index rose 30bps from 96.70 to 97.00
A rate increase could come as early as September if economic data hold firm
… Officials are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials. But the message in their post meeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead …
Such a message would get the attention of traders in futures markets, who see low chances for the Fed moving as early as September. In early June, traders on the Chicago Mercantile Exchange placed a probability of greater than 60% that the Fed would raise short-term rates by at least a quarter percentage point by its September policy meeting, according to the CME. The probability dropped sharply after a weak May jobs report and the June 23 Brexit vote and was just 12% on Monday.
As Hilsenrath weaves into his story, public comments by various hawkish regional governors have been again trying to talk up more rate rises than the market expects. But the chatter has had very little impact.
So the un-named “officials” have given Hilsenrath his scoop. The officials have upped the ante and tried to get the market to take the regional governors more seriously.
The Fedborg is not at all happy that it keeps getting overruled by more sensible regional governors in alliance with more sensible permanent Fed members like Lael Brainard. So, the Fedborg stoops to spin pressuring markets and the sensible governors alike. We hope that the they will fail again, but what really needs to happen is a Kocherlakota “house cleaning” of these back office experts and their replacement with more rounded, sensible, evidence-based, pro-prosperity types. Or they could just recognise their errors and stop pushing financial stability that results in financial instability.
Although in the short term the Fed can often influence rates in the way they wish ultimately it depends on the market. The market ultimately will send rates down if the Fed tries to raise them now.