On the November FOMC
The “case for an increase in the federal funds rate has continued to strengthen” – although the few changes in the statement language only point to weakening spending and a flimsy and cautious case for higher inflation. Job growth is “solid” – so an implicit Phillips Curve argument carries the day. Any shock – such as a surprise in next week’s election, or a legal mess in its aftermath – could defer the hike. But we’re resigned to it at this point, though we think it’s a mistake. With financial conditions so much easier than they were at lift-off last December, we don’t think a hike would cause great harm, but eventually there will be a hike that does. Fortunately the curve implies just one hike per year for the next three years. Yellen is aware of inherent uncertainties for policy in today’s highly unusual economic environment, and is exploring new options while questioning old dogmas. Unfortunately the FOMC remains mired in conventional wisdom.