Tim Duy´s bottom Line:
Bottom Line: The Fed is set to declare “Mission Accomplished” at the next FOMC meeting.
Indeed, many policymakers have already said as much. Absent a very significant change in the outlook, failure to hike rates in December would renew the barrage of criticism regarding their communications strategy that prompted them to highlight the December meeting in their last statement.
Once they have communicated their intentions for subsequent rate hikes, they will turn their attention to the issue of normalizing the balance sheet. Even though officials have not committed to a specific path, I am working with a baseline of 100bp of tightening between now and next December, or roughly 25bp every other meeting. I expect that by the second quarter of next year they will begin communicating the fate of the balance sheet.
Whether they should hike or not remains a separate issue. Over the next twelve months we will learn the extent of which the Federal Reserve can resist the global downward pull of interest rates. Other central banks have been less-than-successful in their efforts to pull off the zero bound – not exactly a hopeful precedent.
How come “Mission Accomplished” if over the past five years nothing of relevance has changed? Don´t tell me about the “low” (maybe too low for them) rate of unemployment. That´s at least two stages removed from “relevant”. They´re only grasping at the first straw that floated down.
NGDP growth is running below average (3.8%), RGDP growth is right on average (2.1%) and core inflation is below average (1.5%)
In fact, the “Mission” was accomplished five years ago when the FOMC, after pulling the economy up by it´s hairs, decided that´s the pace they wanted it to keep!
They should be careful because the beast is showing signs of fatigue again. It needs more “fuel”, not less. But find a “better grade” one!