On the September FOMC and BOJ

https://trendmacro.com/system/files/reports/20160921TrendMacroLuskin-L9.pdf
Donald L. Luskin
Wednesday, September 21, 2016
The FOMC didn’t “blow itself up,” but threatens to in December. The BOJ seeks overshoot.
Federal Reserve
Bank of Japan
As we expected, no rate hike. But “roughly balanced” risks and three hawkish dissents set the stage for a December hike. This is inexplicable to us considering that the “longer run” estimates of the “neutral rate” continue to come down sharply, and that market-implied long-term inflation expectations are at or near the lowest in the history of the data. Normatively, the Fed should do nothing in December – and election-driven volatility will probably make that so. But without a risk-off environment between now and then, positively, we have to admit a hike seems likely. The BOJ announced an overt policy of inflation-overshoot, and “yield curve control” pegging the 10-year at 0.0%. Overnight rates, which act now only as a tax on banks, were not made even lower, so bank stocks rallied. The yen strengthened, but this is a not a clear signal of failure of these new policies. Since 2014 the yen has been a passive function of USD, which itself has been a passive function of the oil price.
Section: 
TrendMacro