And it wasn’t even “close”!  Because it shouldn’t have been!

– Email sent on Sep 17



My post-FOMC emails are in the Appendix – read them if you haven’t already.  After some more thought, below are additional takeaways:

  • SIX FOMC members walked into the meeting thinking that there should be a hike. How do I know this?  The projections are submitted before the actual meeting.  There were 5 members who thought we get two hikes by the end of the year and Lacker thought we get three hikes.  The only reasonable way you can get two hikes by the end of the year is to hike in Sep and Dec.  You basically have to be a nut-job to think the optimal course of action to get two hikes is to hike in Oct and Dec, after telling the markets for over a year that the path will be slow.  Some things were discussed at the meeting (probably the things I discussed the past few months in the CA) that led five of the six to abandon their preference for a hike and agree with the majority (as there was only one dissent).  To the Furious Five’s credit, they listened to the arguments for a no-move and they agreed.  BTW, it’s not a coincidence I have ignored the SIX high dots for well over a year now.
  • I think Yellen is in the “1 hike in 2015” camp. There is a small chance she is in the 0 hike camp, but this seems unlikely (see Appendix).  My best guess is that her over/under is closer to 0.75 than 1.25 hikes in 2015.  She probably has been in the 1 hike camp since June.  That one hike sounds more like December, as she alluded to things taking a little while to settle down.  The markets are pricing in about 11bps of hikes by the end of the year.[2]  SHE TOLD YOU SHE SEES A 25BP HIKE BY THE END OF THE YEAR!  So the majority of the 14bp difference[3] must be the markets pricing in more economic weakness than she expects.  The key question going forward is not what our expectation of headwinds are in the next three months, but what the headwinds will be relative to her expectations of headwinds.  She is a dove.  Her expectations for continued economic progress can’t be particularly high.  I said a few months ago that it’s less than 50-50 we see a hike by the end of the year.  This was mostly because of headwinds that the Fed rhetoric seemed to be not paying attention to.  Well, now I know from the Sep meetings that the Fed is looking at some of those headwinds… and they still think they hike this year.  So I need to rethink my under 50-50 call, and probably go over (all other things being equal).  Thus far, we have not really seen much of the headwinds in the data, except in manufacturing.  The big question is, do we see a noticeable downturn in activity (or inflation) by December?  I’m not sure – but if we remain constructive, I think Yellen is going to want to hike once, before we start seeing the yoy rise in inflation around year-end and into next year.

[2] Assuming FF effectives are around 14bps

[3] Part of the difference may be because after liftoff, FF effectives may not trade 14ps into the new target range, as it is currently.  Another part could be her not being fully convinced of a hike.