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By HaleStewart September 21, 2016 3:08 pm
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A Divided Fed Leaves Rates Unchanged

     On Wednesday, the Fed decided to leave rates unchanged.  Their statement contained some interesting tidbits:

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

Although the case for raising rates was stronger, the Fed decided to hold off.  There are a few potential reasons for this inaction.  First, the latest manufacturing and service readings from ISM contained very large drops.  While both are still positive, the magnitude of the declines along with fairly severe internal weakness may signal that “something” is out there.  In addition, the latest retail sales and industrial production numbers declined.  The combination of these 4 numbers could have been enough to put the Fed into a more cautionary stance.

In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.     

The Fed is focusing on total CPI/PCE rather than using each’s tabulation without food and energy prices.  Both are currently near 1%:

The Fed vacillates between using core and total; now "total" is their preferred measure.  My thoughts are that President Brainard is the primary reason for the inclusion of this measure.

     And finally, we have this:

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.  

There are now three Fed Presidents who want to raise rates.  Yellen, Brainard and Bullard are all dovish.  Brainard will remain in the dove camp for the foreseeable future.  The St. Louis Fed has announced a new policy framework which puts Bullard clearly in the dove camp.  And it’s hard to see Yellen as anything but a dove .  That leaves three – Powell, Tarullo and Fisher – to vote for raising rates.

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