E Dissension At The Fed

Recent news that the Consumer Price Index (CPI) rose 1.6% YoY which was 0.6% YoY higher than the previous reading and the strongest reading in the last six months has re-ignited concern that the ultra-low interest rate policy the Fed has pursued since the financial crisis will result in an inflationary environment which will be tough to stop once it starts.

“As we move away from the low inflation rate of the fall, Fed officials who are concerned about deflation will take a little bit of comfort”, was how Conrad DeQuadros of RDQ Economics described it.

A diminishing risk of deflation is different than the risk of rampant inflation to be sure and Brian Jacobson, chief portfolio strategist at Well Fargo Management LLC is sanguine on the latter saying that the hawks at the Fed “are probably going to be beating a drum that not many people are going to be marching to”.

If there is dissention at the Fed over inflation, Gabriel Mann and William O’Donnell, rate strategists at RBS believe that that is only one of a few topics on which the Fed Governors disagree.  “It seems that the Fed is far from finding a consensus on at least two very critical questions: 1) how to proceed with the forward guidance and 2) how to interpret the drop in the unemployment rate.”  Additionally, the RBS team sees the 10-yr yield as range bound between 2.60% and 2.82% with only a very small chance of hitting 2.90%.

Minutes from the latest Fed meeting show officials agreeing that “it would soon be appropriate” for some adjustment in guidance but there was little if any clarity as to how to change it.  “Our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions”, John Williams, San Francisco Fed President said adding, “This is best done by trying to explain how we are likely to react to economic developments, rather than putting down specific, quantitative markers for future policy decisions.”