Fed Governor Brainard came through with dovish comments, citing a variety of reasons for monetary policy not to tighten. In particular, she cited the likelihood of continuing low inflation, evidence of increased capacity as the Unemployment Rate has been steady despite strong Payroll gains this year, and downside risks from abroad. She continues to provide the best analysis of the US economic situation among all the Fed officials.
Fed hawks (like Williams, Fischer and apparently Dudley) cited the strength of June-July economic data to raise the potential for a September rate hike. But, this analysis was dubious, as the June-July strength risked being just a temporary catch-up from the weak May. They should have known this, and, indeed, that is what occurred as the August data softened. Low growth may persist, as the NY Fed nowcast model projects a slowdown in Real GDP Growth to 1.7% in Q416 from a projected 2.8% in Q316. Moreover, the latter risks being revised down as data come in.
In an environment of slow economic growth and low inflation, when would it be appropriate for the Fed to tighten? My view is that there would be a natural window for the Fed to tighten when there is a substitute force to spur the economy. And, this force is likely to be fiscal stimulus. If the new Administration -- whether Clinton or Trump -- implements a large enough program of fiscal stimulus -- either tax cuts, government spending increases, or regulatory reform -- that boosts the economy significantly, the Fed would have an opportunity to raise rates. This idea suggests that the earliest window for the Fed to tighten may be mid- to late-2017.
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