Themes

The themes in last week’s speeches were an apparent contrast between Yellen and almost everyone else who has spoken since the March meeting; the focus on data dependency; and the emphasis on a very slow pace of normalization. Yellen’s talk was very dovish, as she essentially repeated the dovish tone of the March statement, macro projections, dots, and press conference. In contrast, Lockhart continued to talk about the possibility of hiking in April or June; Williams said his forecast for the U.S. and the global economy had remained largely unchanged over the past few months; Evans said that he expected the economy to be strong enough to warrant two hikes this year, most likely in June and December; and Mester, while more cautious, also appeared more hawkish than Yellen. Policymakers, in their interviews as well as their speeches, uniformly emphasized the data dependency of the pace of rate hikes and that the pace should be “very slow” (George) and “very shallow” (Evans). Kaplan cautioned that normalization could take “an extended period,” and Mester said that “gradual is the watchword.” But is there really a schism between Yellen on the dovish side and almost everyone else who has spoken since the meeting? We doubt it. Yellen was speaking about the March meeting and reflected the tone of that day’s communications; she had to so close to the meeting. The others were more looking ahead to April and June. Frankly, I see a lot of “two dotters,” notwithstanding whether they mention the possibility of an April hike or three hikes (Lockhart), talk about not getting behind the curve (George and Mester), or place more emphasis on global risks (Williams in an interview and Yellen). The key to a hike in June is the economy evolving as expected by FOMC participants, as reflected in their projections prepared for the March meeting. Those projections were predominantly based on two or three hikes. Of course, with the June meeting so far away, we don’t know whether the data will pass the threshold for a rate hike.That accounts for most of the differences in views among policymakers. The data will build the consensus.

Revealing quotes

• Williams (interview, 3/28): “Global disinflationary factors are still holding inflation down…The data to me isn’t so much about the labor market continuing to improve, I’m very positive on that, it’s more about inflation moving back to 2 percent in the context of very strong headwinds [which include the strong dollar and low commodity prices].”
• Bullard (interview, 3/28): “The April and June meetings are definitely live meetings, and the committee could move at those meetings, but we’ll see what the data looks like at that point.”
• Williams (speech, 3/29): “We have either reached or are close to maximum employment across a broad range of markers. On the inflation side, we’re not quite where I’d like us to be, but recent developments have been very encouraging and add to my confidence that we’re on course to reach our goal…my overall outlook for both the U.S. and the global economy remains largely unchanged over the past few months.”
• Yellen (speech, 3/29): “Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December. Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy.”
• Yellen (Q&A, 3/29): “The baseline economic outlook the Committee saw both in December and March looks quite similar. But the committee in March did rethink to some extent the policy path that’s appropriate to achieve an essentially unchanged outlook. So I would say the major thing that’s changed between December and March that affects the baseline outlook is a slightly weaker projected pace of global growth.”
• Kaplan (discussion with reporter, 3/29): “My message is not to hold off, it’s just to be patient and cautious.” The process of normalizing rates could take “an extended period of time.”
• Kaplan (comments to reporters after speech, 3/29): “You should not assume that” hiking in April isn’t an option. “All eight Fed meetings are live.” “It’s important that we move toward removing accommodation,” but it “should be done only gradually.”
• George (remarks, 3/29): “I’m not advocating that high interest rates, that this is an economy that needs cooling off, by no means…What I’ve advocated for is not allowing excesses to build up in a way that will cause us to have to react very quickly at the point we see the economy overheating.”
• Evans (interview, 3/30): “My assessment is the economy is going to be strong enough [that] we’ll be raising rates two times this year. It could…well be more if we do better.”
• Evans (speech and Q&A, 3/30): “a very shallow path — such as the one envisioned by the median FOMC participant in March — is the most appropriate path for policy normalization over the next three years.”
• Evans (interview, 3/31): “My assessment of appropriate monetary policy is that given the economy and what we’re looking at, it would be two rate hikes this year…I guess I would sort of say, one in the middle of the year, one at the end of the year.” “Any improvement in the outlook would give rise to a stronger funds rate path.”
• Lockhart (interview, 3/31): “If [the data] continues to confirm a basic outlook of moderate growth or getting closer and closer to our objectives, in employment and inflation, then a further rate increase in one of the next two meetings may be justified…I would not rule out more than two. I just think there’s still scope for three increases this year. I do not expect four increases, but I think there is scope for three.”
• Dudley (Q&A, 3/31): If the economy stays on track “then I think we are going to continue with the gradual normalization of monetary policy.” “Risk management considerations” favor tightening in a careful manner.
• Mester (speech, 4/1): “At our March meeting the FOMC maintained the target range for the federal funds rate at ¼ to ½ percent. I did not dissent from that decision. Even though I expect it will be appropriate to continue on the path of normalization this year, I recognized that the data we had on the first quarter were limited. I agreed that a reasonable case could be made to wait until more information could be gathered and assessed to see if they confirm that the economy is evolving as anticipated.”
• Mester (interview, 4/1): “Despite all [the] drags, and they are downside risks to the outlook, the economy’s been very resilient…To me, it makes me think that it is appropriate that we are on this gradual normalization path…It makes a lot of sense to be gradual because that will prevent us from having to be less gradual later on if we delay too long.”