The Fed's policy message from Jackson Hole, Wyoming, last week was entirely reasonable in the absence of any reliable indication of the fiscal and structural economic measures of America's next administration.
It, therefore, seems that the weakening U.S. bond market read too much last Friday into the Fed's view that the current inflation indicators and labor market conditions had strengthened the case for an interest rate increase – most probably another 25 basis-point pinprick.
At the moment, however, there is nothing even so mildly threatening on the horizon.
The last report on reserve movements, dated August 17, showed that the Fed's monetary base was only 4 percent below its average year-earlier level, and the effective federal funds rate closed on Friday 9 basis points below its official target.
Arguably, that's the way it should be. As a matter of sound monetary management, and a modicum of Beltway comity, the Fed is right to wait for the new administration to show its hand with respect to fiscal and structural policies it intends to implement. The Fed has strong evidence to demonstrate, if need be, to the new legislative and executive authorities that the monetary policy alone cannot carry the entire burden of economic stabilization.
Don't do it alone – it's a G20 issue
Only a careful evaluation of the new fiscal and structural policies will allow the Fed to properly calibrate its action to support the economy, maintain price stability and ensure the soundness of the financial system.
These are matters of delicate fine-tuning, because the new fiscal policy (a mix of tax changes and public spending) will have a limited room to maneuver. Rearrangements of national priorities will be required to keep the budget deficit and the gross national debt around 4 percent and 114 percent of GDP respectively.