You're listening to taking stuff with Kathleen Hayes and Pim Fox on Bloomberg Radio. The Federal Reserve and led by FED Chair Janet Yellen, may have opened the door even
wider to an interest rate increase in December. However, they narrowed that they shut that door a little bit more on aggressive rate hikes in two seventeen, as their so called dot plots show that the median forecast from the Federal Open Market Committee is for just to interest rate increases next year instead of three markets in rally mode. Is UH this the correct response or should the markets be focusing on the fact that a majority of Fed
officials still see a rate hike this year. Vincent Reinhardt joins US now. He's chief economist at Standishmellon Asset Management in Boston, home of Bloomberg Radio twelve hundred. He started his career at the New York Federal Reserve Bank. He worked at the Board of Governors and the divisions of Monetary Affairs and International Finance, and during the last six years of his careers at the FED Secretary and Economist
of the FLMC the Federal Open Market Committee. So Vince understands very well how these policy statements, decisions are decided on, orchestrated and communicated. Vince, welcome back to the show. Thank you. Kathleen, Hi bim And he's right there saying Hellovian. So what is your take on what we got from the Fed yesterday? So essentially it was a compromise and a divided committee. My model of the FLMC decision process is that um A, the committee has to pull along a reluctant chair. Janet
Yellen is really dubage. She does want to test to see how low the unemployment rate can go, and in that environment, she also appreciates that you can keep the funds rate lower for longer by sometimes agreeing to tighten monetary policy, because never saying yes means you'll lose your committee and you have to compromise. They said no yesterday
with the promise of yes in December. Vincent Reinhardt, Okay, hello, No, I was I was waiting for Kathleen there, but because you know, we were both looking at these dot plots and I got to confess, they kind of looked like a bad pac Man game, and uh, if you could just go through them, because you write in your note here that three of the voting members, uh three, all but three of them view at least one quarter point
tightening by the end of this year as appropriate. Right, So that's done and went December, So we should get used to twenty five basis points in December. That's right. And I do admit it looks like eighties video game. There's a their two gang of threes to think about. First, in the statement, three bank presidents dissented in favor of rates rising immediately, and in the dot plot three unknown participants. I think I know who they are. Three unknown participants, uh,
demured from tightening policy in two thousand sixteen. Well, i'll tell you my three for the because because I cheated, I already read your note. I'll tell you my three for the descents. Right, three descents to the statement, and we know that that's Esther, George right, and Mester as
well as Rosencrant. That's right, okay, And I think the three dots UH in favor of not changing rates this year, probably two governors, Governor Brainerd and Taruo, and then Bank President Evans, who earlier this year said he was not in favor of raising rates. It's interesting to me, vince, because listening to Janet Yellen at the press conference yesterday, and on the one hand, she speaks for the entire committee. That's what the fedcher always has to do, represent where
the you know, the bulk of the consensus is. And of course she mentioned that yes, case for rate hiker strengthen, as I said in Jackson Halls repeated that, and yes inflation is going to move higher. But you know, in all the things she talked about there, you still got a sense, at least I do, that she's not the one leading the charge for the next interest rate increase. She talked in fact about the participation rate and showing that maybe discouraged workers are coming back in is as
a reason to give the economy room to run. That doesn't sound like an urgency to raise the rate. Oh, I think the committee has to pull her along when enough participants get rest of get talk at uh in public about the need to tighten policy. Well, it's stinking about the Jackson Hole speeches. Yes, she said the words there's a need for tightening, but it was timeless in the sense that she didn't put put a date to it. If she had wanted to put tightening on the table.
If she wanted expectations about action in September, she could have done it with about three words inserted into exactly the same speech she decided not to vincent reinhard. Is this a dry I'm behind the scenes? Is there any soap opera behind all this? Could this ever get turned
into a Netflix you know series? Because it seems as though you're talking about these are still you know individuals, and you've got the twelve members, and then the seven members of the Board of Governors are the governors of the Federal Reserves, and then the president of the New York Fed. Maybe just tell us about the personalities involved. Uh so you can find in the fo m C transcript me telling the committee at one point. Don't you understand I work for nineteen people who couldn't agree on
the color of an orange. So yes, I feel you're paying pim. But part of the I think the real answer is we don't know, because for the entire tenure of Janet Yell in his chair, markets have been more devilish than their own rate guides. You're focusing a lot on the dots, but the your dollar curve still lies everywhere below. What the f MC is projecting as the path for rates. If you're if you're you're a chair. That's an easy problem because markets are not testing you.
They may test them right well, Vince, you know, Uh, And of course, Uh, the market reaction is interesting today because the dollar has weakened a lot of people are looking again at the dot plots for next year coming down a bit. Stocks are rolling, bonds are rolling. And one of our stories, uh sums it up more or less as the divergence bet, the bet that's been on there's supposed to strengthen the dollar of the Federal raise rates this year and other central banks will remain easier.
Use further is weakening because now the Fed has you know, punted again. They say they're going to raise rates at the end of the year. We've seen this happen again. So what do you make of that part of the analysis? Oh, I think that's exactly right that at the beginning of
the year. I think it would be right to depict policy rates across the advanced economies is defining a channel at the bottom or the EC being the bank in Japan and a few other at zero or negative at the top or small advanced economies like Australia or New Zealand and Canada, uh and who had rates around two and the said was going to be seen as moving from the bottom of the channel to the top of
the channel. In doing so, it gives the pre appreciation of the dollar, giving some relief to the Japanese and in the Euro area from their problems was dealing with disinflation as it got closer to the top end of the band, the Canadian dollar, the New Zealand dollar, the Australian dollar would depreciate. That would mean they wouldn't have to ease. What's happened is the feeder reserved isn't moving
up that card or in the carridor's collapsing. Those other central banks are tired of waiting for the said, and they've been easing their own rates. Well, I'm just noting here, Vincent, just to give you the numbers, and you comment or break in whenever you know you've got a thought, because I'm looking at, for example, a can dollar versus the US dollar one thirty or if you do it the other way, zero point seven six, but also the end one hundred against the dollar. The euro at at one
twelve sterling at at one thirty. Any thoughts, So one thing to do is just type up W I R P on your Bloomberg terminal and you'll see the real test of the Fed market participants only put a fifty eight percent probability of policy action by December. So despite the dot plot, despite what you know, how the the statement was designed to induce expectations of policy tightening. Uh, market participants don't believe me yet. Just quickly, we've got
about forty seconds left here. Bank of Japan wanting to steep in the yield curves and tweaks this week. I guess that's the other part of the dollar weaker equation. What do you make of the Bank of Japan's move? The theory is, if you build it, they will come i E. They're putting in place an automatic mechanism to be very accommodated if in lation and inflation expectations rise, because they will be defending the tenure yielded zero i
E rates will be more negative. UH. Problem news. They don't have a mechanism right now to spur inflation, and that's been their problem for a while. So in some sense, they punted on the big issue. But They made sure that if inflation does not rise, they can sustain it. I want to thank you very much for spending time with us. Boy, that's a that's a real education. Vincent Reinhardt, he is the chief economist that standish Melon Asset Management.
Joining us from Boston, of course, home to Bloomberg. This is taking Stock. I'm pim Fox. My co host Kathleen Hayes, this is Bloomberg.