The Fed takes a look beyond US data
But what really worries some Fed officials is not the trade data, but the slippery matter of market psychology. If the UK voted to leave the EU, this could unleash profound investor uncertainty; indeed, if this leads to a wider break-up of the bloc it would be a “systemic” shock, in Fed parlance. Fed officials learnt the hard way in 2008 that in today’s tightly entwined global markets, market shocks have a habit of unleashing contagion in unexpected ways. They do not want to repeat the experience.
Is this a sensible stance? I would argue so. Waiting longer to raise rates certainly creates some risks: it leaves the US economy with an excessively loose monetary policy for longer; it may also create the impression that the Fed is becoming a hostage to global events, which could in turn create even more investor anxiety. But Brexit is a slightly unusual global event in the sense that it is binary, and pinned to a specific date. And given that the Fed has tended to pay too little attention to global market linkages in the past — rather than too much — the fact that it is becoming aware of these dangers seems laudable, not reprehensible.
Indeed, in my view the Fed should now go even further and use the Brexit issue to spell out how it intends to incorporate an analysis of those “market” and “non-American” issues into its broader analysis in the future. That would not be easy to define. But in a world of tightly entwined global markets, it is a fallacy to think anyone can run monetary policy on the basis of domestic real economy data alone. Just look at the past decade’s credit bubble and bust for evidence of that.
Or, to put it another way, the really big policy issue that Brexit has raised for the Fed will last far longer than the vote on June 23. For the time being, though, all eyes are on Ms Yellen — and that British polling data.