Fed all talk, no action?
BofA Merrill Lynch Global Research economist Ethan Harris thinks all the talk of a Federal Reserve rate hike is just that — talk. Harris, a former Federal Reserve Bank of New York economist, said much of the recent hawkish commentary has come from presidents of the regional Fed banks, and that may not be indicative of the thinking on the Fed’s board.
“The signals don’t come from Reserve Bank Presidents or advisers,” Harris wrote in a note to clients. “They come from either the overall committee — in the form of the official statements — or from the core of the committee — that means (Chairman Ben) Bernanke, (Vice Chairman Donald) Kohn, and to a lesser extend, New York President (William) Dudley.”
The Fed starts its two-day policy-setting meeting on Tuesday, and Harris is certainly not alone in thinking they’ll stay the course, keeping benchmark interest rates near zero. In fact, BofA Merrill thinks it will be the European Central Bank that hikes before the Fed.
“The bottom line is that faced with roughly the same economic backdrop — very low core inflation, moderate headline inflation and a large but slowly closing output gap — we expect the ECB to be more hawkish than the Fed,” they wrote. “We expect a replay of the summer of 2008, when the ECB hiked in response to high headline inflation, but Bernanke held back the Fed for fear of fragile financial conditions. Of course, thankfully, a replay of the fall of 2008 is unlikely.”