Eye On The Fed

Diving into a Pool of Higher Rates

Where…Up; When…September

CHICAGO–(BUSINESS WIRE)–Mesirow Financial Chief Economist Diane Swonk observes the Federal Reserve closely for indications on where short-term interest rates are headed and when. She says the first answer is “up” and the second is “September,” which has been her call all along.

 Fed Chair Janet Yellen has talked about a dashboard of indicators for the labor market, but Swonk judges that the recent employment data was decisive, especially the upward revisions to previous months.

“The labor market got its mojo back in May, which edged us closer to liftoff.” The Fed’s dual mandate includes inflation and employment, but they are not always equally weighted. At this juncture, Swonk reports “Yellen has been clear…that wage gains are not a precondition for liftoff, as wages tend to lag overall improvements in the labor market.”

Not everyone is in sync

Janet Yellen may be clear about the economy’s readiness for liftoff, but others who vote on policy are not necessarily in sync. Chicago Fed President Charles Evans, for one, has long been in favor of waiting until next year to move on interest rates.

Our chief economist acknowledges the policy debate but says the conclusion is not in doubt. “The vote to raise rates will be met with resistance…(but) We call it the ‘Yellen Fed’ for a reason. Janet Yellen’s vote counts more than anyone else’s when it comes to setting monetary policy.”

Diane Swonk notes that reaction in financial markets here and overseas is a factor in the equation because of the tendency to spill over. “The U.S. economy is not Las Vegas. What happens here does not stay here; it travels around the world and returns to our shores, often with a vengeance.”

Excerpts from Diving into a Pool of Hgher Rates:

Preconditions for Liftoff
The Fed needs to meet two conditions before it achieves liftoff:
1. The labor market needs to show further signs of improvement.
2. The Fed has to be “reasonably confident” that inflation will return to its 2% target in the medium term (3 to 5 years)

The U.S. economy is not Las Vegas. What happens here does not stay here. it travels around the world and returns to our shores, often with a vengeance

Inflation: Not There, Don’t Care
Inflation has fallen below the Fed’s 2% target and stayed there for the better part of the last six years. Core (nonfood and nonenergy) inflation has also missed the mark by a fairly large margin. 
Why does the Fed care so much about “core” inflation? Because overall inflation tends to converge to core inflation. And, it is quite simply the best indicator we have of how inflation will perform in the future. If core inflation looks like it might move up, so will overall inflation.
That said, core inflation does not need to be at 2% for the Fed to achieve liftoff. Fed officials just have to be “confident” that it can get there over the next three to five years. They already believe that is doable. Indeed, many on the Fed were encouraged that core inflation held up as well as it did 
despite falling oil prices. They had expected to see more of a spillover from low oil prices into other prices in the economy and were also pleasantly surprised that falling import prices did not place much of a drag on core inflation.

Read more about the Federal Reserve’s map for policy normalization in the latest issue of Themes on the Economy. Or, watch a video to hear Diane Swonk answer key questions about what comes next. Archived issues can also be found at mesirowfinancial.com.



Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with approximately 1,200 employees globally. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its website at mesirowfinancial.com.