The Honeymoon Phase Has Officially Ended

Since Janet Yellen took the helm at the Fed in early 2014, she has enjoyed a period of relative conformity within the ranks. Most meetings have produced unanimous decisions and individual FOMC participants have generally followed the committee’s script when speaking publically. This period of peace and calm is now giving way to what appears to be a mix of confusion and frustration. As the Fed has been forced, for a variety of reasons, to hold rates low for much longer than expected, we are seeing signs of dissention within the ranks. Individual Fed governors are publically calling out the Fed’s targets, suggesting new ways of thinking about central banking, and expressing confusion and frustration as to why the economy is not performing in-line with the committee’s targets. St. Louis Fed President James Bullard, who has a history of openly speaking his mind, officially ended the honeymoon phase in June when he suggested that the FOMC should not raise interest rates at all over its forecast horizon of 2.5 years. More recently, SF Fed President John Williams suggested last week that the Fed should increase its inflation target, which would effectively let the economy run hot before raising rates again. On the flip side, minutes from the Fed’s July meeting revealed a camp of FOMC members who favor raising rates in the near term. The real fun may begin this week, when Yellen addresses the annual central bank conference in Jackson Hole, WY. We expect her to stay close to home in her comments and reiterate much of the same message that she has all year, which is one of accommodative policy and data dependency. But, you can bet that behind the scenes the conversations are growing more difficult, setting the stage for a more contentious Fed in the months ahead.

Source: RBS, WSJ