Fed decision coming at the top of the hour
The Fed can't justify hiking rates based on inflation. It's low and falling.
Instead, the Fed could look elsewhere for reasons to tighten.
Economist Tim Duy makes a great argument for the Fed to remain hawkish but still patient. Financial conditions have loosed in the past year despite higher rates.
He makes three points:
- The Fed will associate looser conditions with better growth both now and later
- Easier conditions point to the possibility of instability down the road, something they want to head off
- The falling dollar will contribute to easier conditions ahead
He said one surprise that could come this week would be an announcement on reinvestment now.
Ultimately, he thinks the Fed will stay patient but easier financial conditions (and stocks at a record) are the best argument for acting sooner rather than later.
