Fed: Decision to stand pat was the most complicated in years - BBH

Research Team at BBH, suggests that the Federal Reserve's decision to stand pat was the most complicated in years.  

Key Quotes

“The case for a hike had strengthened, Yellen said, but still the consensus to hike was not there.  Three regional Fed presidents dissented, the most in a couple of years.  In the dot plots, 3 (of 17) did not see a hike this year.  Many suspect that at two of those came from Governors Brainard and Tarullo.  The idea is that they may have dissented to a rate hike, and at the end of the day, Yellen chose to keep the Board of Governors united.  

The FOMC statement reintroduced a risk assessment that it had removed in January.  This is also seen by many as a necessary precursor to a hike.  Yellen herself indicated the Fed was prepared to raise rates this year provided the labor market continued to improve, and no new risks emerged.  Some apparently think this guidance could translate into a November hike.  We are skeptical.  There is simply no precedent for a hike so close (one week before) to a national election.  Bloomberg's calculation puts the odds of a November hike as high as 21.4%.  The CME assessment, whose methodology we tend to share, puts the odds at 12.4%.  

There were two other important housekeeping duties the Fed appears to have completed at yesterday's meeting.  First, it has taken another step in the process begun earlier this year of lowering the long-term Fed funds equilibrium rate.  It now stands at 2.9%, down from 3% in June and 4% a year ago.  Second, it reduced what it sees as the long-term growth potential to 1.8% from 2%.  There is some risk that the long-term potential growth is revised lower again, as the weakness in productivity growth acts as a drag.  

Yellen defended the Fed's action several times against reporters who pressed Trump's argument that the Fed's reluctance to raise rates is a reflection of their support for Clinton.  We suspect that to the contrary, as a rate hike would have been seen as a "seal of good housekeeping."  A rate hike would have said that the economy is sufficiently strong to allow for a continued normalization of policy.  We also argue that other such banks, who are still in an easing mode, would have welcomed a Fed hike.”