Markets have had to contend with slowing global trade and growth, collapsing EM currencies, commodity prices and equity markets topped off by Brazil’s credit rating downgrade to junk status and a surprise renminbi devaluation. Perhaps most problematic has been policy-makers’ lack of direction and vision. The US is gripped by election fever and the ever growing list of presidential candidates. The Chinese government and central bank have multiplied policies to deal with slowing growth and wild stock-market gyrations, so far with seemingly limited success. The eurozone – still reeling from the Greek debacle – is divided about how to deal with an immigration and refugee crisis. The UK is pondering the implications of a newly elected extreme left-wing opposition leader and a likely referendum on EU accession while the Bank of England blows hot and cold on whether to start thinking about hiking rates. On the other side of the world Australia has got its fifth prime minister in five years. But it’s arguably the US Federal Reserve’s lack of a unified message which has kept markets on tenterhooks ahead of Thursday’s policy meeting.

1. Fed is people-dependent
Markets have had to contend with slowing global trade and growth, collapsing EM currencies, commodity
prices and equity markets topped off by Brazil’s credit rating downgrade to junk status and a surprise
renminbi devaluation.
Perhaps most problematic has been policy-makers’ lack of direction and vision. The US is gripped by
election fever and the ever growing list of presidential candidates. The Chinese government and central
bank have multiplied policies to deal with slowing growth and wild stock-market gyrations, so far with
seemingly limited success. The eurozone – still reeling from the Greek debacle – is divided about how to
deal with an immigration and refugee crisis. The UK is pondering the implications of a newly elected
extreme left-wing opposition leader and a likely referendum on EU accession while the Bank of England
blows hot and cold on whether to start thinking about hiking rates. On the other side of the world Australia
has got its fifth prime minister in five years.
But it’s arguably the US Federal Reserve’s lack of a unified message which has kept markets on
tenterhooks ahead of Thursday’s policy meeting.
Fed’s “data dependence” is ill-defined
The Fed is supposedly “data-dependent”. The problem is that it is unclear what relative weights it attaches
to macro data – namely growth and inflation – versus financial data characterized by weak and volatile
global equity markets but somewhat more robust bond markets. Currency developments, namely the
strength of the US dollar – up a further 2.5% in trade weighted terms since the 29th
July Fed meeting – and
EM currency weakness sit awkwardly between macro and financial developments; or more accurately they
are both policy tools and by-product of market supply and demand.
Furthermore it is unclear what relative weights the Fed attaches to decent domestic macro data versus
global macro data which, bar a few small exceptions, have been weak (emerging markets and commodity
exporters), losing momentum (Japan) or getting stronger but from a very weak base (eurozone).
Fed is people-dependent
So Thursday is as much about the ten voting members of the Federal Open Market Committee (FOMC)
making a decision as to the data they are analysing and interpreting. Perhaps unsurprisingly they have
different takes on where the US and global economy are heading and therefore when to start hiking the US
Fed fund rate.
Figure 1 highlights some of their most recent comments, which are categorised as neutral (yellow), dovish
(blue) or hawkish (orange). I am fully cognisant of the subjectivity of such an exercise. For starters, we
don’t have much of a track record to work from – of the ten current voting members only three have ever
voted for a Fed fund rate change and that was a very long time ago (Yellen, when she was San Francisco

2. Fed President, and Lacker voted for a hike in 2006 while Evans voted for rate cuts in 2008). With this
caveat in mind:
Two members – Fischer and Lacker – are clearly in the hawkish camp and pushing for the Fed to hike
sooner rather than later.
Two members – Dudley and Evans – are in the dovish camp. However, Dudley’s comments precede
the release on 27th
August of a far stronger than expected upward revision to Q2 GDP growth to 3.7% qoq
annualised. Evans’ comments, while very dovish, are now more than two months old.
Three members – Lockhart, Powell and Williams – are seemingly still sitting on the fence. Note that
Powell’s comments are now more than six weeks old.
Three members – Yellen (who has the casting vote), Brainard and Tarullo – have not recently
commented publicly on US monetary policy or the US economy.

3. Figure 1: Ten voting FOMC members – and a spectrum of views
Source: Federal Reserve, Financial Times, Reuters, CNBC
Janet L.
Yellen
FOMC Chairperson "I expect that it will be appropriate at some point later this year to
take the first step to raise the federal funds rate and thus begin
normalizing monetary policy. But I want to emphasize that the
course of the economy and inflation remains highly uncertain, and
unanticipated developments could delay or accelerate this first
step".
10-Jul
William C.
Dudley
FOMC Vice Chairman & Federal
Bank of NY President
"[...] it is important not to overreact to short-term market
developments [...] International developments have increased the
downside risk to US economic growth somewhat. […] I really do
hope we can raise interest rates this year. But let’s see how the
data unfold before we make statements about when that might
occur."
26-Aug
Charles L.
Evans
FOMC Member & Federal Bank of
Chicago President
"Mid-2016 is where I envision the first liftoff. I just don’t see why we
should be in a hurry with all of the risks that we face. A little more
time doesn’t hurt."
09-Jul
Stanley
Fischer
FOMC Board of Governors "Given the apparent stability of inflation expectations, there is good
reason to believe that inflation will move higher as the forces
holding inflation down - oil prices and import prices, particularly -
dissipate further, is good reason to believe that inflation will move
higher”.
29-Aug
"Don’t overestimate the benefits of waiting for the situation to clarify
[...]. There is always uncertainty and we just have to recognize it
[...]. If you wait that long, you will be waiting too long."
28-Aug
Jeffrey M.
Lacker
FOMC Member & Richmond
Federal Bank President
"It's time to align our monetary policy with the significant progress
we have made […]. It's quite unlikely that a one-month blip would
materially alter the labor market picture or, for that matter, the
monetary policy outlook […]. Over the last year or so, reports of
difficulty finding and hiring qualified workers have become notably
more widespread and persistent."
04-Sep
Dennis P.
Lockhart
FOMC Member & Atlanta Federal
Bank President
"(The) most recent data I saw was about a 50% probability, so it's
50-50 around the next meeting. And that seems to me, given the
current circumstances, a reasonable assessment of the situation.
[...] It has to be considered an open question whether we move now
or wait a little while."
28-Aug
Jerome H.
Powell
FOMC Board of Governors "First-half growth looks a little stronger now after the first quarter
was revised up. Second quarter was reasonably good. The labor
market continued to be strong […]. I believe there is more slack in
the economy than 5.3% [jobless rate] would suggest [...]. We've
waited and I think been patient. And I think that's the right thing to
do. I think the time is coming for a rate hike, if the data bears out."
05-Aug
John C.
Williams
FOMC Member & San Francisco
Federal Bank President
"All of the data that we have had up until now has been, I think,
encouraging. It [...] has been about as good, or better, than I was
expecting, in terms of the U.S. economy. But there are some pretty
significant - and I would say have now grown larger - headwinds that
have developed [...]. We all want to keep the expansion going. We
still have a way to go. So we don’t want to in any way hamper the
economy from getting back to full employment and 2% inflation.
“But at the same time, I do think there are risks of waiting too
long."
07-Sep
Daniel K.
Tarullo
FOMC Board of Governors No public comment on US economy or Fed monetary policy since
early June
Lael
Brainard
FOMC Board of Governors No public comment on US economy or Fed monetary policy since
early June

4. Hawks outweigh doves amongst non-voting FOMC members
The five other FOMC members – Bullard, George, Mester, Rosengren and Strine – will attend Thursday’s
meeting but will not vote. Recent comments by Bullard, George and Mester have a hawkish tint while
Rosensgren’s comments are balanced with a dovish bias. Strine, whose appointment was effective 1 July,
has not publicly commented on the US economy or Fed monetary policy in recent months (see Figure 2).
Figure 2: Hawks outweigh doves amongst non-voting FOMC members
Source: Federal Reserve, Financial Times, Reuters, CNBC
Based on the dovish lean of the voting members, I’m forecasting rates to remain on hold, which is more
closely aligned with market pricing. Analysts, policy-makers and academics are very much divided.
Market
The Fed fund futures market is pricing in only 5-6bp of rate hikes at its policy meeting on Thursday – put
differently the market attributes only a 20-25% probability of the Fed hiking its policy rate from 0-25bp to 25-
50bp. At the surface this suggests market participants think the Fed will, rightly or wrongly, give greater
James
Bullard
FOMC member & St. Louis Fed
President (non-voter)
"For emerging markets, the smaller economies, they're often
looking for a weaker currency. So from their perspective a
tightening move by the Fed might be helpful to weaken their
currency and help them do what they want to do."
31-Aug
Esther
George
FOMC member & Kansas City Fed
President (non-voter)
"This week's events complicate the picture but I think it's too soon
to say it fundamentally changes that picture, so in my own view, the
normalization process needs to begin and the economy is
performing in a way that I think it's prepared to take that."
27-Aug
Loretta
Mester
FOMC member & Cleveland Fed
President (non-voter)
"I want to take the time I have between now and the September
meeting to evaluate all the economic information that’s come in,
including recent volatility in markets and the reasons behind that.
But it hasn’t so far changed my basic outlook that the U.S.
economy is solid and it could support an increase in interest rates."
28-Aug
Michael
Strine
FOMC member & New York Fed
First Vice President (non voter)
No recent public comment on US economy or Fed monetary policy
Eric
Rosengren
FOMC member & Boston Fed
President (non-voter)
"Given current and forecast conditions, not only is the pace likely to
be gradual, but the federal funds rate in the longer run may be
lower than in previous tightening cycles […]. We are exposed to
international factors, so if there is a global slowdown, we won’t be
perfectly insulated. But I think the U.S. economy is strong enough,
that the risk of foreign weakness tipping the U.S. into a recession
is a “relatively low-probability event.” [...]. Recent reports on wages
and salaries still show few signs that the tightening labor markets
are translating to increases in wages and salaries consistent with
reaching 2%inflation [...]. There’s an awful lot of uncertainty about
inflation. Our best guess is that we’re on a path that will get us to
2%."
01-Sep

5. weight to weak global growth, inflation and equities than to signs that US growth and tighter labour market
(including 5.1% unemployment) could become inflationary.
Analysts
Analysts are split down the middle – in a recent Bloomberg poll, 37 out of 75 analysts forecast rates on
hold, 37 forecast a 25bp rate hike and one thought the Fed would innovate with a 12.5p hike. I can see the
attraction of an unconventional 12.5bp hike, even if it is not my base case scenario. It would take the policy
rate to a simple 25bp (rather than the current band), be closer to what the market is currently pricing in and
tally with the consensus within the Fed that the rate hiking cycle needs to be slow and gradual.
Officials and policy-makers
Prominent officials, policy-makers and academics are divided about what the Fed will do or at least what
the Fed should do on Thursday (and the implications if it doesn’t). International institutions such as the
World Bank and IMF advocate rates remaining on hold while a number of emerging market central bank
governors are calling for an end to the Fed’s zero-rate policy (see Figure 3). The latter’s argument is that a
Fed hike would remove the uncertainty that has gripped the market. I don’t think it’s that simple.
Figure 3: IMF and World Bank dovish, EM central banks see benefit of Fed hike

6. Kaushi Basu World Bank Chief Economist "I don’t think the Fed lift-off itself is going to create a major crisis
but it will cause some immediate turbulence,” Mr Basu said. “It is
the compounding effect of the last two weeks of bad news with that
[China devaluation] ...In the middle of this it is going to cause some
panic and turmoil."
09-Sep
Narayana
Kocherlakota
Federal Reserve Bank of
Minneapolis President
"Barring big changes in the data between now and September […].
I don't see a near-term increase in interest rates as being
appropriate, and by near term I mean really through the course of
2015."
28-Aug
Donald Kohn Brookings Think Tank Senior Fellow
& Former FOMC Vice Chairman
"I expected a slow recovery, but I expected credit to become more
available over time, and zero interest rates to have more of a
stimulative effect on spending than they appear to have had. This
has been a disappointing recovery."
10-Sep
"You do see broader dis-inflationary forces at work” in China and
the rest of the world. One would hope that by waiting a little while
you could process better how strong they were and how they would
feed back onto the U.S."
03-Sep
Christine
Lagarde
IMF Managing Director "The Fed has not raised interest rates in such a long time, that it
should really do it for good, not give it a try and then have to come
back. The IMF thinks that it is better to make sure that data are
absolutely confirmed, that there is no uncertainty, neither on the
front of price stability nor on the employment and unemployment
front, before it actually makes that move."
05-Sep
International
Monetary Fund
"Advanced economies should maintain supportive policies. In most
advanced economies substantial output gaps and below-target
inflation suggest that the monetary stance must stay
accommodative"
4-Sept
(G20 note)
Connie Razza Center for Popular Democracy
Director of Strategic Research
"There is no threat of inflation. The poll shows Americans believe
“the U.S. economy is not healthy enough to raise rates right now"
10-Sep
Kenneth Rogoff Harvard Professor, Economic
Advisory Panel of the Federal
Reserve Bank of New York, former
IMF Chief Economist
"The [inflation] models have not been very good for a long, long
time since the financial crisis, and why you would want to rely on
that and not be more on seeing inflation I don't understand. After
your models have been so off for so long - your ship's been thrown
around in a storm and you don't know where you are when you land -
you kind of want to see the inflation more than usual."
11-Sep
Joseph Stiglitz Columbia University professor and
Economics Nobel Prize Winner
"Now is not the time to tighten credit and slow down the economy." 10-Sep
Larry Summers Former US Treasury Secretary "Two weeks ago, I argued that a Federal Reserve decision to raise
rates in September would be a serious mistake. As I wrote my
column, the market was assigning a 50% chance to a rate hike.
The current chance is 34%. Having followed the debate among
economists and Fed governors and bank presidents I believe the
case against a rate increase has become somewhat more
compelling even than it looked two weeks ago."
06-Sep
Yao Yudong Head of the People's Bank of China
Research Institute of Finance and
Banking
"So we hope the Federal Reserve could further delay its interest
rate rise, giving emerging markets ample time to prepare. The Fed
should not only consider the U.S. economy, but should also
consider the global economy, which is very fragile."
27-Aug
Mizra
Adityaswara
Central bank of Indonesia Senior
Deputy Governor
"We think US monetary policymakers have got confused about
what to do. The uncertainty has created the turmoil. [...] The
situation will recover the sooner the Fed makes a decision and then
gives expectation to the market that they [will] increase [rates] one
or two times and then stop."
09-Sep
"The more certainty there is, the better." 29-Aug
(Jackson Hole)
Augustin
Carstens
Central bank of Mexico Governor "If the Fed tightens, it will be due to the fact that they have a
perception that inflation is drifting up, but more important that
unemployment is falling and the economy is recovering […]. For us,
that is very good news."
30-Aug
(Jackson Hole)
Jon Faust Economics Professor at Johns
Hopkins University
"The only trouble [of waiting a little] is that it will take more than a
month or two to sort out what’s happening. That’s a thing that will
play out over a year."
September
Richard Fisher Former FOMC member and Federal
Bank of Dallas President
"Monetary policy, too, operates with a lag. If the Fed waits for full
employment and then has to throttle back sharply, there will be a
nasty shock. The upcoming Fed meetings present a timely
opportunity to start slowing down the engines, however slightly, so
as to maintain the confidence of markets, businesses and
consumers alike."
10-Sep
Charles Plosser Former FOMC member and Federal
Bank of Philadelphia President
"I think there's a lot of concern in the committee about the
consequences of such a prolonged period of zero interest rates.
There's a lot of people who would like to see us get away from zero,
just as a matter of principle, and I think that's not a bad idea. The
longer it goes on, I think the more uncomfortable some people
become."
10-Aug
Raghuram
Rajan
Central bank of India Governor "It’s preferable to have a move early on and an advertised, slow
move up rather than the Fed be forced to tighten more significantly
down the line."
29-Aug
(Jackson Hole)
Julio Verlarde Central bank of Peru Governor "The uncertainty about when the Fed hike will happen is causing
more damage than the Fed hike will itself."
10-Sep

7. Source: Federal Reserve, Financial Times, Reuters, CNBC
Fed can offer vision, not certainty
To the extent that the Fed is data-dependent it cannot offer certainty, because data (and market
developments) are uncertain, not to mention open to conflicting interpretations. Therefore the Fed can offer
guidance, a well-defined set of targets and a vision, but that’s not the same as certainty.
If the Fed hikes on Thursday, the uncertainty will temporarily fade but will be rekindled as we head towards
the Fed’s 16th
December meeting. If US and global data and financial markets disappoint in coming
months, the market will have to contend with the uncertainty of the Fed contemplating cutting rates. At the
very least the Fed could pause for a very long time (“one and done”) which arguably equates to a tacit
admission that perhaps it was wrong to hike in the first place.
Another argument in favour of a rate hike this week is that it would signal that the Fed is confident about the
US economy or perhaps knows something that markets and analysts don’t. But in a world where nearly
everyone has access to most of the numbers, it’s unlikely that the market will suddenly believe that the US
economy is doing far better than we thought.
Finally, the hawks have argued that hiking rates now would give the Fed room to cut rates if/when US
growth started to slow again. But if hiking rates weakens the US and/or global economy, having the room to
cut rates once or twice won’t help much, particularly if the Fed’s credibility has been dented in the process.
Put differently, why take the risk of creating a problem just to give yourself a solution (cutting the nose to
spite the face springs to mind).