Why the Fed Is Wishy-Washy

Third, the extent to which the U.S. economy's behavior hasn't adhered to Fed models: The inaccuracy of Fed projections is bound to raise questions in the minds of central bank officials as to the robustness of their understanding of economic developments. The broader these questions are and the longer they persist, the more risk averse Fed officials would be in embarking on a change in rate policy. 

Fourth, the divergence in central bank policies: The Fed's deliberations on tightening stand in stark contrast to the stimulative stance that other central banks are pursuing. This difference will probably intensify, particularly for the European Central Bank, the Bank of Japan and the People's Bank of China. Another consideration: China's currency devaluation last week has put pressure on many emerging-market currencies, making U.S. central bankers uncomfortable about the risk of a rate increase that strengthens the dollar. That could compromise U.S. exporter's ability to compete and undermine the country's economic lift-off. 

All in all, the Fed had no choice but to once again come across as wishy-washy — not so surprising given the extent of uncertainty with which it's dealing. As such, it will remain noncommittal until the very last moment before its September policy meeting. And, in order to ensure its options are wide open, it will also double up on efforts to divert market attention away from the timing of the first hike and in favor of three elements that would characterize this cycle of impending rate increases, which I like to call the loosest tightening in Fed history: a very shallow path for future hikes, a decision-making process that remains highly data-dependent and a ceiling for policy rates that is below the historical average.