Fed board still cautious - Commerzbank

Nine of the twelve regional Federal Reserve banks had called for an increase of the discount rate in September, but unlike the regional presidents, the central Fed board is much more cautious, said Bernd Weidensteiner, analyst at Commerzbank.

Key Quotes

“Nine of the twelve regional Federal Reserve banks had called for an increase of the discount rate in September, as apparent from the minutes of the discount rate meeting. The banks had referred to a tighter labour market and rising wage pressure in many sectors”

“Unlike the regional presidents, the central Fed board is much more cautious. In the eyes of many market participants, this view was strengthened by a speech held by Janet Yellen in which she discussed whether the weaker potential growth rate after the crisis could possibly be pushed up again by accepting an overheating of the economy. That said, Yellen held this speech at a research conference of the Boston Fed. She debated the question of whether weaker demand growth in recent years had also weighed on the supply side of the economy, i.e. the potential growth to be achieved in the long term. Her question is to be understood more as a research question for economists than a current policy instruction.”

“After all, there are hardly any signs of overheating at present, which makes a gradual normalisation of interest rates possible in the first place. Should the economy overheat, Yellen would then hike interest rates at a faster pace, as she said at the last press conference.”