A strong consensus has emerged for a rate hike in the near term, most likely by July, and June is clearly on the table. Many participants have said that at least two hikes would likely be appropriate this year if the economy performs as expected, and quite a few have said two or three hikes might be appropriate. However, last week’s talks by Yellen and Powell suggested that the next hike will come in July, not June.
Yellen’s remarks deservedly got the most attention. Greg Mankiw asked her, “Can you tell us anything about the path of monetary policy going forward?” He said she was welcome to say no. But she said yes: “It’s appropriate—and I’ve said this in the past—I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months such a move would be appropriate.”
“Coming months” didn’t sound like an alert for a June hike, but put the markets on alert that the FOMC would likely soon be ready to return to a gradual path of normalization. We see her as reluctant to raise rates in June, expecting that a rate hike in July will be appropriate and favoring, subject to the incoming data, two hikes this year. That’s more dovish than those who could see as many as three hikes this year and puts her, not surprisingly, on the dovish side of those who favor at least two hikes this year.
Powell’s tone seemed consistent with Yellen’s. While he said “another rate increase may be appropriate fairly soon,” he added a key caveat: “The risks of waiting are frankly not so great.”
As for other policymakers, Harker joined Williams as seeing two to three hikes as potentially appropriate, saying that said he “can easily see the possibility of two or three rate hikes over the remainder of the year.” If someone wants to keep open the option of three hikes this year, he or she is likely to support a hike in June. Rosengren was more cautious than in some earlier talks, preferring not to weigh in on the number of hikes.
Relevant to the June or July options, there was also a lot of discussion of whether Brexit uncertainty should or could weigh on the June decision. Bullard, on the one hand, said that “it won’t weigh much on the Committee,” but he also noted that his view might be “an outlier.” Harker seemed to hold a similar view. Powell, on the other hand, said, “I can imagine the upcoming Brexit vote as presenting a factor in favor of caution about raising rates in the U.S.” And Rosengren and Williams indicated it might be a factor if there is financial turbulence.