We soon will finally get the first presidential debate, which markets as well as investors, logically, will have on their radar screen.
In context of the Fed, today we will have four FOMC members speaking and participating on panels. Given the fact that within the Fed itself there exist multiple colliding forces, which is certainly not desirable, about U.S. monetary policy.
The latest FOMC votes reveal that three members of the FOMC dissented in favor of a rate hike now while a same number of voters didn’t want raising rates at all this year, which was at the FOMC an extremely rare event.
In the past, even when dissent was more widespread, the FOMC “effectively” closed one or two dissenters in order to actually show a vote that was along what the majority wanted and by doing so maintained the so-called façade of unity. If that was a good practice remains of course another question.
Perhaps, the present situation of that many dissenters suggests a deeply divided Fed, which reflects too much uncertainty. So, it could be interesting to see if today’s Fed speakers will enlighten investors and markets somewhat or if we will get another confusing overall picture, similar to the ones we have gotten used to for getting from Fed speakers as of lately.
Nevertheless, it’s a fact we have come a long way from the mono-culture of the Greenspan era.
Today’s Fed speakers, of which no one is known for being a dove are:
- Atlanta's Fed President Dennis Lockhart who is not an FOMC voter and considered as moderately hawkish,
- Cleveland's Fed President Loretta Mester who is a FOMC voter and considered as moderately hawkish,
- Philadelphia's Fed President Patrick Harker FOMC (prepared remarks) who is a FOMC voter and considered as a centrist, and
- Dallas Fed President Robert Kaplan who is also a FOMC voter and considered as moderately hawkish.
Coming back for a moment on this week’s FOMC decision, which was one of the most widely anticipated decisions of recent times, signaled, within the constraints of the Fed statement, that a December rate increase is on the cards.
Now, and related to the three dissenters, investors could do well keeping an eye on this situation as this goes beyond just three FOMC members voting for a hike now in September when at the same time there are three other FOMC members, and this according to the unhelpfully over-simplistic dot-chart, which did not expect a rate increase at all this year.
To put it simple, this does display the present riven nature of the Fed and it probably could be wrong to simply characterize this as a hawk vs. dove division. It is more than that. This is the consequence of opinions of all multiple directions, which leaves all categories of investors with a boatload of uncertainties that are certainly not helpful for making sound investments.
It must be said that central bank policy is not a binary issue any more, not least because there are multiple channels by which central banks can seek to influence outcomes, namely; monetary, quantitative and regularity.
So now, what?
Barring significant disruption to the economy and with what we know today, the Fed will probably raise interest rates in December and could signal for next year a cautious approach to rate increases (yes, in plural). But there is great urgency for having public debate about whether other channels will be used to tighten Fed policy, in particular the quantitative policy channel, which is already tightening.
For the moment, I don’t think it’s an overstatement to say that long-term investors are obliged by the Fed, to some extend extent at least and certainly not intentionally, for flying blind ... but that's the way it is.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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