The Federal Open Market Committee of the Federal Reserve (FOMC) will meet on Wednesday amid signs that the broad consensus among economists in favour of an interest rate increase around mid year is beginning to crumble. So far, there is no public indication that Ms Yellen and her key supporters are changing their minds, but many leading economists outside the Fed, from across the spectrum of economic thought, are now vehemently opposed to the Fed’s plan. It would not be surprising if the Yellen camp were reviewing their intended date for lift off, though we are not likely to see much evidence of this at the January FOMC meeting.
Since the last FOMC meeting in December, when Ms Yellen gave a very clear signal in favour of a June lift off, the market has moved sharply in a more dovish direction. Bond yields have continued to plummet, with break-even inflation expectations falling markedly. Furthermore, the front end of the bond market is now ignoring the FOMC’s projections for rates almost completely (see the “dots” chart on the right), in effect challenging Chair Yellen to tell them next week that they are wrong.
This is getting much more tricky for Ms Yellen. The smooth, fully anticipated, glide path towards a June lift off is now being seriously challenged, both in the markets, and among influential outside economists, who are directly accusing the Fed of complacency (here and here). But there is still some time left before the final decision has to be made. The Fed Chair will probably want to retain her option to move in June in next week’s FOMC statement but, on the other hand, is unlikely want to deliver a major hawkish shock to market opinion at this stage. This week’s meeting will be a holding operation. Read more