The Federal Reserve and Fed Chair Janet Yellen are in a tough spot.

You see, even Fed Vice Chair Stanley Fischer―he of four rate increases in 2016 “are in the ballpark” fame―cannot get the markets to acquiesce to the idea that higher U.S. interest rates are coming soon. After his speech over the weekend at the Aspen Institute, where he said that Fed targets on the employment and inflation fronts are close to being met, the dollar, which is the true barometer of Fed tightening expectations, made a minor move up and then gave it all back. Previously, William Dudley and John Williams, two other prominent members of the Federal Reserve, tried to get market expectations righted but to no avail.

Fed Rate Hike Agenda Problematic

This is nothing new. With respect to growth and inflationary expectations, the Fed and the markets have been at odds since 2010, and the markets have won every single skirmish. The Federal Open Market Committee (FOMC) tightened policy once in December 2015 and has been back pedaling ever since. With U.S. growth in the first half of 2016 at a very tepid level, the Fed’s rate-setting agenda is becoming more and more problematic.

Despite Fischer’s misguided assertions in early 2016, when he confidently asserted that quite a few interest rate rises were coming this year and was subsequently proven wrong, I have a great deal of empathy for him and other FOMC members who share his view that U.S. interest rates are about to ratchet up.

If cyclical employment and inflation were the only guideposts, the U.S. economy, on a cyclical basis, is actually quite close to full employment, and core inflation―at least for now― is also getting close to the Fed’s target. If you, as a FOMC policymaker, focused only on the U.S. economy alone, perhaps you could be excused for thinking that the time to normalize interest rates is nigh.

But the challenge for U.S. policymakers is that in a world of free-floating currencies, and with the rest of the world mired in disinflation, they cannot just look at U.S. cyclical conditions alone and make policy decisions in isolation.

They could, but if they did, the dollar, the world’s reserve currency, would end up being the equalizer and send the U.S. economy into a downward spiral and plunge the world into a renewed disinflationary (or potentially deflationary) cycle. Fed policymakers do not want that, and that really was the innovation in their thinking in 2016. That makes the Fed’s job incredibly difficult: They want to tighten policy, but can’t due to global conditions.

Markets Call Fed’s Bluff on Rates

What makes their job even more difficult is the fact that the market consensus has now accepted this underlying thesis, which has been further reinforced by Brexit. We all finally and collectively believe that rates are going to remain low for a long time on a global basis. That, in turn, has led to a global rally in risky assets and increased credit growth in the corporate sector.

As a result, while top line growth rates remain constrained on a global basis, including the U.S., the various equity and credit markets are making new highs. This scares the daylights out of the Fed’s contingent of financial stability hawks, who are still smarting from the dot com and housing bubble bursts, despite the fact that there are no such significant bubbles in the economy.

Again, Fed policymakers want to tighten, but can’t due to global considerations. Markets accept that now and are calling their bluff.

What Will Yellen Say?

That brings us to Yellen’s much anticipated speech coming later this week at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. It is very difficult for me to see how her speech could be much different from Dudley’s speech last week.

With the U.S. economy in a better, but far from frothy spot, Yellen is likely to acknowledge the recovery in growth and employment, but at the same time hide behind data dependency to not commit to any specific rate path. She probably wants to talk down the risk markets lest they potentially get consumed by irrational exuberance.

At the same time, Yellen does not want to repeat the Fed’s mistakes of 2015 that led to the global economy cratering. Maintaining that delicate balance is a tough calling but that is exactly what the Fed and Yellen are trying to successfully do.

The bottom line, from my perspective, is that not a whole lot has changed on the global policy front. Policy remains easy and, despite Fischer’s assertions, Yellen is unlikely to change that outlook at Jackson Hole.

I continue to like U.S. equities, U.S. and European credit, and emerging markets rates and equities.

For more news and commentary on current market developments, view the full archive of Krishna Memani’s CIO Insights and follow @KrishnaMemani.