Fed up? Not just yet

The market view over whether the US Federal Reserve would raise interest rates this month was slow to gel, but eventually there was a near-unanimous consensus that there would be no move. And so it has proved, with only one dissenting voice on the FOMC.

A quick skim through the press release suggests that the Fed is content with the way the domestic economy is performing: activity is expanding "at a moderate pace", the labour market is strengthening and inflation expectations are stable. The key reasons for keeping rates on hold yet again seem to relate to international factors. Growth in US net exports has been slow, reflecting the emergence of slower growth in a number of key markets. The Fed appears to believe that a faltering expansion in the rest of the world will exert downward pressure on both growth and inflation in the US.

Is this the Greenspan Fed redux?  Regardless of what was happening in the domestic economy -- bubbles in the housing market, overvaluation of financial assets -- the Maestro could always find a reason not to lean too hard on the monetary brakes. Looking at the current US situation objectively, it's impossible to justify keeping rates in a 0-25 basis point range any longer, but that's where we are.

The problem Ms Yellen and her colleagues face, of course, is that they and we have never been here before. Nobody has any idea what will happen when the Fed starts to take away the seven years' worth of free money that the markets have been gorging on. None of the central bankers who devised the emergency response to the financial crisis, back in 2007/8, gave much thought to the question of how their bold experiment might be brought to an end when the time came, but it's a racing certainty that none of them thought the experiment would still be going on seven years later.

It's clear that a lot of analysts and market players are terrified of what may happen when the FOMC pulls the trigger -- check out this piece from the CBC website, published before today's announcement. The one thing that seems safe to say is that continually finding reasons not to hike rates is not going to make things any easier when a move finally comes.