The Credibility of The Fed

After leaving interest rates unchanged this week, the credibility of the Fed is being questioned by pundits. Many commentators believe that a second rate hike is long overdue after the December 2015 move that roiled the financial markets. The overwhelming sentiment after that rate hike was that we would see several subsequent hikes in 2016. But, as the poet Robert Burns wrote, 'the best laid plans of mice and men often go astray."

The Yellen Fed has been very transparent and consistent in reiterating that they are going to continue to be highly data driven. While some economic indicators are indeed improving, and there is some evidence of inflationary pressures rising, the wealth of the evidence doesn't warrant that rates be hiked at this time.

The Fed was dealt a difficult hand this year, as the recent Open Market Committee meeting calendar has not been conducive to making any policy moves. The Brexit vote was scheduled just days after the June meeting, and we all saw what happened in response to that surprising result. Imagine what would have taken place in the financial markets if the Fed had raised rates, as those same pundits argued vehemently for at the time, prior to that vote.

The September and November meeting dates are too close to the upcoming presidential election. Simply put, the Fed cannot be seen as interjecting itself into the political arena. The economic evidence would have to have been overwhelming to justify any move on rates this week.

Republican candidate Donald Trump has chastised Chairman Yellen for keeping interest rates historically low. By keeping rates low, Trump claims the Fed is creating a "false stock market" and that rates are being kept lower to "boost Obama's legacy."

Trump is certainly well within his rights to interpret the Fed's actions (or inactions) in that manner. But, I would argue that if the Fed had chosen to raise rates earlier this week and had said that it did so because the economic recovery was strong and could withstand a rate hike, a completely different narrative would have been appropriate. Wouldn't raising rates and sending the message that the economy was strong have burnished Obama's legacy, and, by extension, Hillary Clinton's argument that she is the best political choice for the economy? What better argument for an incumbent party's candidate than the economy is moving in the right direction?

The challenge for the Fed has always been at the edges of their authority: monetary policy can only do so much. While candidates find it consistently tempting to imagine political biases on the part of the Fed, the bigger political challenge is fiscal policy. Going there -- where politicians have a lot of heavy lifting to do -- is not nearly as easy as trying to create an artificial enemy out of an institution the public really does not understand.

I believe that the Fed has done a masterful job in navigating monetary policy during and following the financial crisis of 2007-08. Many people forget just how dire the prognosis was when we were in the midst of the crisis. If at the height of the crisis anyone had suggested that in a few short years the stock market would have nearly tripled from its lows and that unemployment would be south of five percent, they would have been laughed at.

Yellen's critics need a good dose of perspective when critiquing the actions of The Fed.