dove cartoonThe Fed’s lack of policy response, and subsequent press conference, evokes memories of a scene in Bronx Tale…

What’s going on here? 

Now you can’t leave. 

I will never forget the look on their faces. 

All eight of them.Their faces dropped. 

All their courage and strength was drained from their bodies. 

They had a reputation for breaking up bars. 

But they knew that instant they made a fatal mistake. 

This time, they walked into the wrong bar.

An opportunity for the Yellen Fed to exit ZIRP came and passed yesterday. Possibly, it will be more convenient to start a rate hike cycle in October/December or possibly, in 2016. But if China enters a recession, and financial markets remain stressed, it is also possible that the Fed will be unable to raise rates during the entire 2010-2016(?) economic cycle.

Wire-to-wire, recession-recovery-recession; no rate hikes for an entire 7+ year economic cycle is possible.


It shouldn’t be a surprise. Janet Yellen is one of the most liberal/dovish economists throughout Fed history, and on September 17th, earned her stripes. Most market participants anticipated either a dovish hike, or a hawkish no-hike. Yellen clearly demonstrated the deep rooted nature of her accommodative bent, and “help the labor markets at any cost” attitude, with such a dovish policy response. No mention made of the risks/consequences of maintaining ZIRP past the expiration date.

The best question by far in the conference (CJF paraphrases):

Given global interconnections, would you be surprised if you never escape ZIRP?

“I would be surprised. This is not how the committee sees the outlook, it’s not near the center of my outlook, but I can’t completely rule it out.”

aflac duck








There is a scenario, on planet earth, where the Federal Reserve never hikes rates this cycle. Yellen said it. Markets have a funny way of forcing issues when provided the opportunity.

Some of the takeaways/learnings, on the margin, from the no-hike and press conference:

*The Fed didn’t hike yesterday, is unlikely to hike in the fall, and the first hike (if any) may be pushed out to 2016

*While some on the Fed’s voting committee want to hike, the dovishness is more pervasive than thought. 4 members want to push any rate-hikes into 2016.

*The Fed continues to expect inflation to remain muted in the near-term, and possibly decline

*In the face of available evidence, Yellen, and Fed staff, continue to put too much emphasis on the Philips curve. The job market is viewed as driving inflation with little/no mention of globalization, competitive dynamics, demographics, deleveraging, robotics/automation, and information technology.

*Stanley Fisher’s views on getting in front of inflation hold little sway

*More important than the timing of the first hike, is that the Fed expects monetary policy to be especially accommodative for an extended period. The trajectory of rate hikes will be gradual.

*The Fed is monitoring financial conditions, the USD, and stock markets very closely. Problematic, because the combination of factors the Fed is looking for to hike may not come together.

*International developments contributed to the fear of a hike

*The Fed is walking a tightrope; ZIRP maintained and a super dovish outlook supports EM but causes USD weakness, enough so to negatively impact fragile DMs in Japan and Europe

*It is likely that Europe and Japan race to announce more aggressive QE to counterbalance the Fed, and get currencies moving lower

*Market participants now must contemplate the Fed never hiking during the current economic cycle

*Fed funds forecasts remain stubbornly too high. If the global economy can’t support 0.25% fed funds today, how do we get 6 rate-hikes in by year-end 2016?

*Let me repeat, if the Fed can’t hike now, it is preposterous to believe there can/will be 6 rate-hikes in 2016, and 10 rate hikes by 2017

*The Fed expects the unemployment rate to fall to 4.8% in 2016 (and no urgency for rates above zero)

*2% inflation is an objective, the 2% level is not a ceiling.

*Economy/fed funds expected to normalize by 2018!?  Seriously? What about recessions…

This policy response will shape markets until year-end. Implications abound and will be covered in detail in upcoming posts.

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  1. Kidchowda on September 18, 2015 at 10:01 am

    CJF, you seem dismayed that the fed did not raise rates. This is surprising. It certainly seems to a lay observer such as myself that the risk of harming a relatively weak economy by raising rates is far greater than the theoretical risk of moderate inflation in not raising rates. I also understand the rationale that we need to raise rates now so we can lower them later if we need to. Ironically, a hike now could necessitate a later reduction. Best to be cautious as the fed is doing and wait and see for a few months. I suggest you ratchet down your response for the time being.

  2. CJF on September 18, 2015 at 10:49 am

    Kidchowda – it wasn’t the decision to leave rates per se… was the extreme dovishness from Yellen at the press conference…and potentially lack of creditbility from the Fed, talking about rate hikes, seeing unemployment at 5.1%, and not hiking. It will be difficult for the Fed to raise at all now. Moreover, the surprise dovishness has destabilized markets in Japan and Europe.

  3. Kidchowda on September 21, 2015 at 5:25 pm

    I don’t share your concern on something so squishy as “dovishness.” If your concern is her comments, she can always walk them back. In any event, Yellin is part of a larger institution that operates within a democracy, and is assuredly a reasonable person. If the time to raise rates has come, I am sure she will recognize or that consensus will force her to. As far as the markets’ reaction, I am not sure that matters much as the markets, as you have often pointed out, are frequently irrational.

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