Fed Lays out Rules of Engagement..again

Comments from the Fed show three things need to happen before they will raise rates, we take a closer look. The US dollar was the top performer to start the week while the euro and kiwi lagged. The Asia-Pacific calendar later is thin.

Comments from four Fed speakers – Williams, Lacker, Lockhart and Bullard – along with Yellen's press conference paint a comprehensive picture of what kept them on the sidelines in September and offers clues about what comes next.

1. Volatility

The August mini-panic rattled the Fed and they're not quite sure what it means. They've detected stress in financial conditions abroad and domestically but they're not sure if it's a blip or a tremor before an earthquake. Lockhart highlighted how the Fed felt comfortable waiting because inflation is still benign.

2. Market Certainty

Officials admitted that it wasn't favorable to have markets so uncertain heading into liftoff. We've argued before that virtually pre-committing to a rate hike is a better option that leaving half the market surprised. Fed credibility isn't at risk and offering a very strong hint about a move before it comes will smooth the market reaction.

3. Inflation

The argument for hiking now assumes that a tighter labor market will produce inflation. In theory, that's true but the Fed isn't sufficiently confident to take action. They want to see genuine signs of rising prices before they vote to hike.

Add it up and it makes it difficult to envision a hike this year. Even if there was a string of spectacular data domestically and abroad, the six weeks before October decision don't leave enough time to warn markets or for more than 1 better data point on inflation. December is still realistically on the table but in all likelihood the data will remain mixed. There's also the case against hiking just before year end. The Fed's Lockhart said that's not a large factor but it could tip the scales.