The Fed has argued that it is easier to respond to an upsurge in economic growth from here by staying conservative at the zero bound than it is to continue hiking and the economy takes a downturn from here. Actually this isn`t even correct, as they could very easily just cut rates again much easier than trying to chase runaway inflation.
But we think there are more dangerous precedents being set by the federal reserve right now. First of all, given the economic condition of the economy based on a broad spectrum of indicators, that if the Federal Reserve cannot normalize interest rates now, that the bar is so high for normalization, this is setting a bad precedent for Federal Reserve policy in a capitalistic economy. If you cannot raise rates under these conditions, then you are committing yourselves to never being able to normalize rates, and this has dire consequences, and the unintended consequences of this extreme monetary policy stance are far worse than any minor incremental benefits to be squeezed out froma continual zero bound approach.
The second precedent that is being set by this Federal Reserve is that US Monetary policy is being set by external factors outside their mandates which are inflation, employment and market stability and not Chinese stock market bubbles, a British Independence Vote, International Terrorism or the effects of a strong dollar on emerging markets.
The third poor precedent being set by the Federal Reserve is being so highly data dependent as to become “knee-Jerk” in responding to every little wiggle in the economic data. To the extent that in preparing for a rate hike which was long overdue the Federal Reserve overreacted to a Brexit vote (which will take two years to fully negotiate) and a poor employment report (after eight years of solid employment improvement and an overall tight labor market) which for all intents and purposes is probably at Full Employment Levels right now. This is the entire role of economists to take a high level or Bird`s Eye view of the economy and economic data. A responsible Federal Reserve cannot be this stop and start in regards to their economic outlook, their economic forecasts and embarking on a normalization rate hiking schedule.
