Earlier this week, Neil Irwin of the New York Times presented research from Robert Perli of Cornerstone Macro to counter those who are increasingly concerned about the narrowing treasury market spread.Irwin first notes that a large number of buyers must purchase government debt regardless of its cost: insurers must buy a certain amount to lower portfolio volatility; banks have increased their purchases to comply with Dodd-Frank's increased capital requirements; pension funds must hold a certain amount for liquidity reasons.This continuing source of demand combined with the attractiveness of U.S. rates relative to the negative yields of other sovereign debt markets goes a long way to explaining the downward trend of U.S. interest rates.As one trader recently noted: “People are looking at US Treasuries and saying it is one of the most politically and economically stable places in the world and we get a better yield,”  Perli’s research concludes about 75% the recent drop in treasury yields is attributable to basic supply and demand dynamics. But while this analysis is intriguing, it’s still the minority opinion; the dominant view is expressed in this quote from Professor Krugman:

What’s consistent with the data, instead, is the notion that investors are throwing in the towel and accepting secular stagnation as the new normal. Almost 8 years after Lehman, no sign of a really strong recovery in sight anywhere; perceived private-sector investment opportunities remain weak. Stock and land prices are pretty high, but probably because of low discounting rather than expected high returns.

This week saw a flurry of Fed public appearances that contained the full range of bullish and bearish commentary.  

On Monday, Kansas President George argued the Fed should start raising rates again:

Federal Reserve Bank of Kansas City president Esther George said Monday she wants the U.S. central bank to get back to raising short-term interest rates gradually to reflect progress on hiring and inflation.

George deemed the current level of short-term rates maintained by the Fed as “too low given the progress we’ve seen in the economy.” She also said keeping rates at super-low levels raises the risk financial markets will run into trouble as an additional factor arguing in favor of lifting the cost of borrowing.

“Gradual adjustments” in short-term interest rates mean the Fed is more likely to achieve its growth and inflation goals, George said. She added that the economy is near full employment levels, the housing sector is continuing its rebound and price pressures are moving back to the levels targeted by the central bank.All of this means short-term rates should move toward “more normal levels,” the Fed official said, while acknowledging a so-called normal rate is not a precise concept.4

George argues the Fed has met its dual mandate: unemployment is 4.9% and various Fed inflation gauges such as the Dallas and Cleveland Fed’s inflation measures are near the Fed’s stated 2% target.It’s also clear she believes this period of ultra-low rates has either created or will create market distortions large enough to disrupt the economy.While this point is debatable, it’s important that someone within the Fed is raising this issue for discussion.  

Fed President Kashkari sits at the other end of the hawk/dove table by arguing the Fed should be in no hurry to raise rates:

The Federal Reserve should not be in any hurry to raise U.S. interest rates because inflation is so low and the economy is still short of full employment, a top Fed official said on Tuesday.

"We feel like we can be patient to let the economy continue to heal before we start moving aggressively to raise rates," Minneapolis Fed President Neel Kashkari said at a Town Hall in Marquette, Michigan. "We should take our time when we go ahead and start raising rates again. There's not a huge urgency to raise rates because inflation is coming up low."

…..

"The key driver for us is, how do we put as many people back to work as possible while preventing the economy from overheating," said Kashkari, who is not a voting member on Fed policy this year but will rotate into a voting spot next year.

Unlike George, Kashkari focuses on the BLS’s overall CPI, which is just over 1% due to weak energy prices. He also references the broader weakness in the labor market (“how do we put as many people back to work as possible”) as shown by the still high U-6 unemployment rate. 

Like Lael Brainard, Dallas Fed President Kaplan takes a more international approach to Fed policy:

Global headwinds are undercutting the Federal Reserve's efforts to boost the U.S. economy, making low interest rates not nearly as stimulative as they were when the rest of the world economy was growing faster, a top Fed official said on Wednesday.

A "slow, gradual, careful" approach to raising interest rates is therefore appropriate as the U.S. central bank deals with this new world of slower growth, Dallas Fed President Robert Kaplan said in a speech in Houston.

....

The Fed is "very sensitive" to the strength of the dollar even though manufacturing and exports have declined as a share of U.S. gross domestic product, he also said.

While most U.S. growth is domestic, exports and related growth are large enough so that an international slowdown will shave at least a small amount off US GDP. The stronger dollar contributes to this development. Here, Kaplan argues that due to the inter-connected nature of economies – especially those of the G7 – the Fed must take “slow, gradual, grateful” approach to policy.  

So – when will the Fed raise rates next?The jury is still out. Recent US numbers show a clear improvement: employment rebounded in the latest report, industrial production has increased the last two months and retail sales have moved higher over the last three. The average projected growth rate of the Fed “nowcasts” projects second quarter growth of slightly over 2%. However, the improvement in the numbers is still recent; the Fed will probably want to see additional firming before they formally commit to a rate increase. And Brexit clearly spooked the markets enough to chill additional action.A hike at the next meeting is clearly out; it won’t be  back on the agenda until sometime in the fall -- if then.