Mitchell’s Musings 10-3-16: Fed Politics Daniel J.B. Mitchell At the September meeting of the Federal Reserve, interest rates were not changed. Presidential candidate Donald Trump indicated he thought the Fed was being political, i.e., helping his opponent. Of course, decision makers at the Fed are aware that there is an election cycle in progress. And, in a sense, they were responding to political events, although not in the way Trump suggests. First, it should be noted that the case for raising rates at this time is weak. Not only is inflation low, it is expected to remain low. As the chart below indicates, financial markets are not anticipating a burst of inflation. The spreads between conventional Treasury securities and inflation-adjusted Treasuries – indexes of the expected rate of price inflation - remain below 2%. In fact, except during the Great Recession and its immediate aftermath, expectations are lower now than they were during previous years when the economy was softer. Put another way, price inflation expectations remain low, despite a seemingly tightening economy, so maybe the economy isn’t all that tight.
And that is a second point. Despite a decline in unemployment to around 5% (the latest monthly figure is 4.9%), it is still unclear if the low level of unemployment in fact signifies “full employment.” As has
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