Fed: Challenges remain – BBH

The US Fed is facing a challenge as the financial conditions have eased despite its efforts to systematically, but gradually it has removed accommodation by lifting the Fed funds target, now four times during this cycle that began in December 2015, explains the analysis team at BBH.  

Key Quotes

“The market is pricing in a little more than a one-in-three chance of another hike this year.”

“The market may be under-appreciating the Fed's resolve, and the weaker dollar and easier financial condition add to the pressure for it to act.  There is a battle between the Fed and investors.  Officials have warned investors that its concern about asset prices have increased.  The Fed has said in word and deed that the current economic conditions warrant a slightly less negative real Fed funds rate.  Perhaps, we too easily forget that the Fed has three goals, not just the dual mandate.”

“References to financial conditions have appeared more regularly in individual speeches by Fed officials, it seems.  Its  minimax strategy of its own trilemma means that the growing risks to financial stability (inappropriate financial conditions for the set of economic conditions) offset some of undershoot of the inflation objective, especially given the continued absorption of labor market slack, broadly understood.”

“The official schedule of the events at Jackson Hole will not be available until August 24, the evening before the event.  However, it has already been reported that Yellen will speak on Friday, August 25 (10:00 am ET).  To the extent she says anything about the current situation, it does not appear likely that she would deviate much from the thrust of Dudley's recent comments.  The topic at hand lends itself to a larger discussion about growth and productivity.  It is an opportunity to trot out her own hobby horse about the important steps that need to be done to increase participation in the workforce.”