There is a lack of a strong consensus among Fed officials, and mixed signals have caused volatility in equity and fixed income markets. Fed Chairwoman Janet Yellen will spend the week before the September 20th-21st policy meeting conferring behind the scenes with the sixteen members of the Open Market Committee (FOMC). She confronts a divided group of policy makers, and there is the potential for more internal dissent than has been normal during her tenure running the Fed since June 2014.1 Governor Brainard, an outspoken member of the FOMC, and considered a Fed “dove” spoke in Chicago, and was closely watched in financial markets as there had been speculation that she would support a rate increase in September.2 Instead she laid out five arguments for why the Fed should stick to its strategy of raising rates slowly.3

What this Means

Governor Brainard described these five features as key to the “New Normal” as they represent departures from the “Old Normal” that prevailed in the economy before the financial crisis, and “…appear particularly noteworthy for our policy deliberations…”4 The five features forming her argument were; 1. Inflation has been undershooting, and the Phillips Curve has flattened. 2. The labor market slack has been greater than anticipated. 3. Foreign markets matter, especially because financial transmission is strong. 4. The neutral rate is likely to remain very low for some time. 5. Policy options are asymmetric.5

She noted particularly that for the past several decades, the Phillips Curve would imply that as slack in the labor market diminished, and the economy approached full employment, the result would be upward pressure on inflation.6 However, in this “New Normal” inflation has not been responsive to the decline of unemployment from 10% after the financial crisis to below 5% in 2016, and instead has undershot the Fed’s 2% target for 51 straight months.7 Additionally, disinflation pressure and weak demand from overseas should continue to weigh on the Fed’s outlook. Weak growth in Europe and Japan, a slowing China, and uncertainty about the UK’s relationship with Europe post-Brexit are expected to create headwinds for the US economy, further exacerbated by the role of the US Dollar as a safe-haven, thus effectively transmitting any overseas weakness into the US economy. This “New Normal” justifies the Fed’s cautious approach to raising rates and “has served us well” said Governor Brainard, and warrants continuing.8 This would indicate that the Fed’s benchmark interest rate, the Fed Funds rate would remain unchanged in the range between 0.25% and 0.5%, where is has been since December 2015.9

Key Observations and Take-aways

A decision to delay however brings its own risks as the Fed could be criticized for confusing market participants with mixed messages, as they began the year indicating that there would be four quarter-percentage point raises of the Fed Funds rate this year.10 However, as Governor Brainard suggested, there has been uncertainty about a range of issues, including market volatility and worse than expected jobs data earlier in the year, and continued concern about the UK’s June vote to exit the European Union.11 Despite the Fed’s hesitance to move rates higher, they face considerable external pressure from some important players in the financial markets.

However, Governor Brainard’s “New Normal” suggests that the Fed can take its time and remain prudent in raising rates, as the economy is growing so slowly, and so rates do not need to move very high in the months and years ahead.



  1. “Divided Federal Reserve Is Inclined to Stand Pat,” The Wall Street Journal, September 13, 2016. Access at:
  2. Ibid
  3. Ibid
  4. “The “New Normal” and What It Means for Monetary Policy,” Governor Lael Brainard Speech at the Chicago Council on Global Affairs. Access at:
  5. Ibid
  6. Ibid
  7. Ibid
  8. “Divided Federal Reserve Is Inclined to Stand Pat,” The Wall Street Journal, September 13, 2016. Access at:
  9. Ibid
  10. Ibid
  11. “The “New Normal” and What It Means for Monetary Policy,” Governor Lael Brainard Speech at the Chicago Council on Global Affairs. Access at:

Newsletter Author: Samantha Regan, Mairi Bryan

Newsletter Contact Person: Nghi Pham

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