Federal Reserve “Dot Plot.” Source: Federal Reserve
As expected, the Fed did not increase their interest rate target. Instead, they decided to wait for further progress in the economy. In her prepared remarks, Janet Yellen emphasized that their decision doesn’t reflect a lack of confidence in the economy. Rather, she noted, the pace of hiring in the labor market seems to have slowed, and inflation is still running below 2%.
In their projections for economic growth, the Fed downgraded 2016 from 2.0% to 1.8%. That’s a nod to reality. So far this year we’ve grown at less than 1%. It’s not likely that the economy will boom in the second half of the year. Indeed, read GDP looks decidedly soft.
Source: Bureau of Economic Analysis
Despite our “blah” economy, three FOMC members dissented: Esther George–who always seems to want tighter money—along with Boston Fed President Eric Rosengren and Cleveland President Loretta Mester. Rosengren has been saying he’s concerned that the Fed will get behind the curve on inflation, and have to hike rates rapidly—as they did in 1994. That would be much more disruptive than a more gradual increase. Mester’s dissent is interesting: it reminds us that she’s generally hawkish, and would have voted to raise rates in June if not for the Brexit vote.
Despite Fed and press efforts to play down the disagreement, three dissents at a Fed meeting is a big deal. It’s the most that I’ve ever seen—and a far cry from the consensus-driven Fed that characterized the Greenspan era. All three dissenters wanted to raise rates. As one observer put it, this is as close the Fed could come to raising rates without raising them.
Source: St. Louis Fed
Looking at all the materials it’s clear that there are three hawks on the board—yesterday’s dissenters. But they’re balanced by three strong doves: Brainard, Powell, and Tarullo. That leaves only six FOMC members in the middle—not even a majority.
The Fed isn’t the Supreme Court: decisions aren’t just yes-or-no, and dissenters don’t have to explain their opinions. But Janet Yellen is leading the most contentious Fed in decades. She noted in her press conference that the Fed doesn’t suffer from group-think. That’s an understatement.
Douglas R. Tengdin, CFA
Chief Investment Officer