The Fed That Cried Wolf

Aesop, the ancient Greek storyteller, and philosopher wrote the Boy Who Cried Wolf over 2,500 years ago. The story is about a bored boy tending sheep who attracted attention by warning of an approaching wolf so many times that when the animal finally attacked his flock, no one believed him.

The Federal Reserve hiked interest rates for the first time in nine years last December and told markets to expect 3-4 more increases in 2016. The Fed cited moderate growth in the U.S. economy and the potential for rising inflation, job and wage gains when they increased the Fed Funds rate late last year.

Last Wednesday, we heard from the Federal Open Market Committee once again and just as at the previous six meetings in 2016, the central bank left rates unchanged with the target for Fed Funds rates between 25 and 50 basis points. So far in 2016, the Fed has cited some reasons for not increasing interest rates. Contagion from other weak economies around the world, particularly in Europe and Asia, has been a critical concern for the Fed. Occasional weak domestic economic data has been another. In June, the Brexit vote was one of the main reasons that rates remained unchanged. Last week Fed struck a positive tone regarding the potential for another rate hike in coming months. The central bank told markets that risks have diminished and that the U.S. economy is expanding at a moderate pace. They upgraded the prospects for the labor market citing strength in the June jobs and wage report. However, inflation remains below the Fed’s 2% target rate due to recent losses in the energy markets. Esther George, a notable hawk at the Fed was the only dissenting vote at the July meeting while all other voting members of the FOMC chose to remain with the status quo.

The promises of last December have faded to the reality of a global economy that continues to prevent the Fed from making further moves in 2016.