Hawkish Yellen

Now read the rest of the story from mauldineconomics.com/the-10th-man. 

Here's an excerpt.
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I have been saying this for quite a while, but nobody is listening to me.
This is not a good Fed. They aren’t making decisions on a predictive, forward-looking basis. They are very concerned about optics, appearances—how things look. And to them, right now the optics of having Fed funds at 0.375% with unemployment at 5% are very bad.
But that isn’t how it’s supposed to work. The Fed has a few hundred PhD economists who are supposed to be doing the heavy mental lifting, trying to predict what is going to happen in the future. And the future doesn’t look so good. The data is weakening, not strengthening. And yet here we are, talking about rate hikes.

There are other considerations.

The first is politics. Everyone at the Fed down to the janitor has spent the last few months denying any political influence in monetary policy decisions, which means that, of course, there is political influence in monetary policy decisions. If the rate hike comes in the first FOMC meeting after the election, in December—it won’t be a coincidence.
But there’s more to it than that. We are beginning to learn that the Fed (much like the Bank of Canada) takes fiscal policy into account when making monetary policy decisions. And fiscal policy, up until this point, has not been all that stimulative. But it will be, soon.

The bad news is that either Trump or Clinton will become president. Bad if you’re a deficit scold, like me. Clinton wants to raise taxes and spend the money on free stuff (like college tuition and infrastructure). Trump wants to cut taxes and spend even more (on a wall, and infrastructure, and the military).

Either way, we are staring down the barrel of quite a bit of fiscal “stimulus.”
A few Fed speakers have hinted that they are taking this into account in their forecasts (you can read more details here). To the extent that you think government spending causes economic growth (a tenuous relationship, for sure), the central bank should respond by keeping monetary policy tighter than it ordinarily would. Which means that the Fed is more likely to hike rates right after the election. Maybe because of politics, but also because of projected fiscal policy.

When I mention rate hikes to people, they are very dismissive. The Federal Reserve has disappointed many investors who were betting on rate hikes for many years. It is a classic boy-who-cried-wolf scenario. Of course, I have been saying since the SIC conference that a rate hike was imminent, so we shall see.