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Fed Messaging Limbo Resurfaces in July FOMC Minutes

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The Federal Reserve is again having trouble getting its message across—so much so that some investors are starting to wonder whether there is a coherent message at all. 

First, a trio of prominent regional Fed presidents last week assured investors that the possibility of a September interest rate hike is alive and well despite implicit market expectations to the contrary.  Then, minutes of the central bank's July meeting said some officials "judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting." 

Haven't we seen this movie before? In the past few years, the Fed has stretched its own credibility by repeatedly promising imminent interest rate increases that were then abandoned at the last minute as underlying economic conditions proved less rosy than forecast. This suggests they might do better to simply repeat the mantra that they are data dependent rather that satiating the market's ceaseless appetite for hints to a specific calendar date for the next move.   

Narayana Kocherlakota, University of Rochester professor and former president of the Minneapolis Fed, has argued that this focus on dates damages Fed policy effectiveness, arguing policymakers should focus on end goals in the economic sphere instead. 

So how is the economy performing with regards to the Fed's dual mandate of low inflation and maximum employment? Meh, at best. Sure, the official jobless rate stands at 4.9 percent, which is just around Fed officials' guesstimate for full employment.

But underemployment remains rampant, inflation remains firmly below target, and global risks keep cropping up. So the overall picture is much less clear than the headline employment statistics suggest. At the same time, median wage growth, a key marker of a true recovery, continues to languish.   

That helps explain why there seems to be so much division within the Fed. Despite the hawkish overall message captured in the above-mentioned hint of an imminent rate rise, there were signs that this inclination was far from universal.  

"Several [officials] suggested that the Committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis," the minutes said.  

Given all the fence-sitting such a division reflects, markets are eager for some direction from the ultimate referee—Fed Chair Janet Yellen. For a while there, it seemed the Fed's board had learned not to leave yawning gaps in her public pronouncements to get filled by noise from regional presidents and errant market speculation. 

Let's hope Yellen can pull off that same sort of unified message in her highly anticipated speech at the Kansas City Fed's Jackson Hole Symposium in late August. 

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