This Week, The FOMC Is Gonna Be All WTF

This is not playing out like J-Yellz had hoped, you guys.
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After raising interest rates at their last meeting, expect a very quiet statement from Janet Yellen and the rest of the Federal Reserve at their policy meeting this week.

A rate hike was always off the table at this meeting anyway, but a run of frustrating data since that rate hike will almost certainly make it hard to muster a consensus for even hinting at further tightening for the time being. That probably includes moving forward in any fashion with their aspirations to begin unwinding the central bank's massive $4 trillion balance sheet -- or even outlining when they foresee moving ahead with that momentous move.

The trends in the Fed's key mandate data have been clear throughout the summer: incremental improvements in the labor market, along with an inflation rate that has been sinking lower and continues to fall well short of the Fed's long-run target. This is a somewhat puzzling dynamic for policymakers, and one that is likely to make agreement on the appropriate moves going forward more difficult to generate than for the rate hikes earlier this year.

Below those headlines figures, though, have been a range of other readings that will put the Fed in wait-and-see mode, or sabotage their efforts to tighten policy. Wage growth remains sluggish, which is probably contributing to the lack of inflation, and productivity growth during the expansion has been, essentially, the worst in the post-war era and shows little sign of sustained improvement.

Another shoe dropped after Yellen's most recent Congressional testimony, when data showed that retail sales slid for the second straight month, dipping 0.2% when economists had projected a 0.1% gain. Those declines came even though Yellen attributed the slower rate of inflation to a range of consumer items, which along with incremental improvements in the job market, theoretically should have firmed up the consumer market during the intervening period.

There are additional reasons for Yellen and other Fed officials to keep their fingers firmly on the pause button until the early autumn, if not into the winter -- though a key one falls under the central banking as art, not science, category. Historically, September and October are perilous months for markets, when the days begin to grow short and the problems that have built up in the economy are easier to see without the glare of the summer sun and the Hamptons hangover.

The current bull market has run for more than nine years, pushing markets to new highs and turning every piece of supposedly worrisome news into a catalyst to reaching new peaks -- a fact which seems to be giving some Fed officials jitters. They engaged in a bit of coordinated warning on rising asset prices and risk appetite last month, with Yellen herself calling them "rich" and San Fran Fed President John Williams arguing the stock market was "running on fumes."

In the moderate parlance of central banking, those comments are like a "WTTTFFF" text to the markets. While the Fed traditionally would move to tighten policy further if they sensed financial conditions had become loose, their current mandate conundrum has tied their hands; they'll be doubly reluctant to move on rates until they're sure that the frothy markets somewhat reflect the state of the economy and won't introduce a whole new set of headaches for them in the back half of the year.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

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