106 THE BiG DROP
Chicago Fed and John Williams of the San Francisco Fed.
Evans and Williams are joined in the new FOMC by Dennis
Lockhart of Atlanta and Jeffrey Lacker of Richmond. Lockhart
is known as a moderate, but he has voted with the doves in the
past and is often in sync with the dovish Evans. Lacker is less
ideological and more data driven. He will vote with the doves
if the data are weak.
As for the governors on the FOMC, they are a more cohesive
group and are all reliably in Janet Yellen’s camp if she wants to
steer policy in a particular direction. Yellen herself is data driven
but has dovish inclinations. She’s revealed her strong support
for quantitative easing (QE) in her public speeches, emphasiz-
ing slack in labor markets as a rationale for not raising rates.
This Fed background is crucial for assessing market ex-
pectations about policy and whether those expectations are
well-grounded. Wall Street economists have been excessively
optimistic in their growth forecasts for five consecutive years.
This is a dismal track record, and you’d be right to be skeptical
about any rosy scenarios for 2015.
Right now, markets are priced for a Fed interest rate in-
crease in mid-2015. Lately, some analysts have been pushing
back the expected date for an increase to the fourth quarter.
But a rate increase in 2015 is not a foregone conclusion.
Preliminary data for the fourth quarter of 2014 show
weaker growth, and this weakness appears to be carrying over
into 2015. The FOMC has emphasized inflation in its guid-
ance on the timing of rate increases, but the inflation signs
have been weak. Deflation may be the greater concern for the
foreseeable future. Labor force participation continues near an
all-time low.
Janet Yellen has already said that the Fed will not raise
rates before the April 2015 FOMC meeting, but even that
meeting is an unlikely turning point. In fact, the Fed is caught
in a conundrum of its own making. Talk about raising rates has