No Clarity from the Fed, so Volatility Ahead

Central banks are supposed to manage economies over the medium term – through business cycles that last at least months but typically run years. Today, the U.S. central bank (the Fed) tells us it thinks the economy is strong enough to warrant a tiny rate hike, and while inflation is low, people still believe it will be normal in the longer term. All very sensible and backed by the data. As such, the Fed indicated it is still thinking about hiking interest rates this year.

Now, just when you think that the path ahead is clear, the Fed committee delivers a “hedge” statement. They are still worried, so they will watch the next month’s worth of data on labor markets and inflation before they make up their minds.

What?!

This will annoy economists and markets alike. Any well-trained economist or central banker should know that one month of data in no way should sway your analysis of a longer run trend. It’s just good statistics.

So, it affirms my view that this central bank is lacking conviction and leadership, and isn’t behaving like their credentials (they have very good economists, like Stan Fischer!) would suggest. Instead, they seem to be too petrified of gyrations in asset markets. In my opinion, outside a massive crash like 1998 or 2008, they should be agnostic about what happens in the stock market.

I’m afraid we will spend the rest of this year watching markets going up and down with every little data release. In the medium term, I think we all crave certainty more than we need interest rates at zero, so the asset markets will be most happy when we know the hike is a done deal in December.