Now that the FOMC has done it, we get to hear about how it was surely the “right” time for it. Unlike September, conditions are supposedly an order of magnitude more settled. That has given the policymaking economists the green light to make sure they start the normalization process before “overheating” becomes the central concern. With August a fading memory, the unemployment rate looms largest for economists. This is not to say that they are convinced the economy is already taking off, only that their models tell them that it is about to (any minute now).
With August’s unpleasantness supposedly behind, there is nothing left to justify yet another orthodox non-action.
Top Fed officials have been saying for months they believed the economy was nearly strong enough to tolerate an increase in the benchmark short-term rate from near zero, where it has been since December 2008. But they have hesitated to move.
The last instance was in September, when the Fed pointed to worries about turbulence in financial markets and uncertainties about growth overseas—particularly in China—as reasons to stay put.
The October FOMC meeting, and the financial conditions contained therewith, apparently sealed all preferences. From Barclay’s (viaBusinessInsider):
When we moved our rate hike assumption to March 2016, we assumed that the volatility in financial markets would be longer lasting and the Fed would have trouble resolving their differences about the viability of rate hikes before year-end. The October FOMC statement and Chair Yellen’s testimony to Congress were more hawkish than expected, suggesting the committee saw downside risks from global developments as having diminished and activity pointing to a “live possibility” of a rate hike in December.
Of course, the unemployment rate is quite flawed, as even the FOMC might admit, and it was curious to see the Fed’s own industrial production statistic so clearly in recession signals released just today, but those, I think, have been flashed to secondary considerations in lieu of this assumed financial placidity. That, again, owes to the models that project a much better economy even though there truly isn’t one right now. Thus, as long as financial markets don’t threaten outright revolt, Janet Yellen seems content to let the modeled trajectory reveal itself.
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