Alan Blinder Bio Photo

Economic Outlook by Alan Blinder

September 2016
Alan S. Blinder

Vice Chairman and Co-Founder, Promontory Interfinancial Network
Professor of Economics and Public Affairs, Princeton University

To almost no one’s surprise, the Federal Open Market Committee decided last Wednesday not to raise interest rates. But to avid Fed watchers, the FOMC statement contained at least three surprises.

First, it repeated Chair Yellen’s words from the Jackson Hole conference that “the case for an increase in the federal funds rate has strengthened.” That was the exact phrase that, when uttered on August 26, convinced most Fed watchers that rates would be going up in September. I guess the economy has not strengthened enough.

Or has it? The second surprise was that Yellen endured three dissenting votes. Now, in most contexts, a 70%-30% majority constitutes overwhelming support. In 1936, Franklin D. Roosevelt defeated Alf Landon with 62.5% of the two-party vote. But the FOMC is different. Unanimity is the norm, and dissent is rare. A 7-3 vote, which happened Wednesday, is the Federal Reserve equivalent of Mutiny on the Bounty.

The third surprise is that one of the three dissenters was Eric Rosengren, the long-serving President of the Federal Reserve Bank of Boston and, more importantly in this context, one of the FOMC’s biggest doves. When your dovish wing starts dissenting in the hawkish direction, you know your committee is becoming hard to control.

What’s next? Normally, a vote like this would lead me to predict a rate hike at the next meeting——unless the economy turns sour. But not this time. The FOMC’s next scheduled meeting happens to fall just days before the November election. And while it’s true, as Yellen reaffirmed Wednesday, that the Fed doesn’t let politics influence its decisions, raising rates six days before the presidential election would thrust the Fed squarely into the political maelstrom——where it doesn’t want to be.

Look for a December hike instead.

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