Themes
The overarching theme from FOMC participants’ communications last week is that a number of participants who supported a pause in March saw that decision as a close call. And with the fears of January and February receding, they see a strong argument for continuing the process of tightening. That led this group, all of whom we would regard as centrists, to come out of the March meeting and almost immediately announce their support for a rate hike in the near term, as early as April, provided the economy evolves as expected. This raises the probability of a hike in April. In the end, we do not think the probability of an April hike is high, in part because it would convey a greater sense of urgency to the normalization process than we think is felt by the broader Committee and by Chair Yellen in particular. Be we do think this recent talk suggests the probability of a hike by June is getting quite high.
Revealing quotes
- Lacker (speech, 3/21): “After the price of oil bottoms out, I would expect to see headline inflation move significantly higher. And after the value of the dollar ultimately tops out, core inflation should move back toward 2 percent. Although recent declines in inflation compensation do give me some pause, I think the evidence indicates that inflation expectations (as opposed to inflation compensation) remain well-anchored.”
- Williams (interview, 3/21): “All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates.”
- Lockhart (speech, 3/21): “There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”
- Harker (remarks after speech, 3/22): “I am not a two-dot person.” He was also reported as having said that the FOMC “should get on with [rate hikes]” and consider another move in April.
- Bullard (interview, 3/23): “I think we are going to end up overshooting on inflation…I don’t have any problem with overshooting…I think the odds that we’re going to fall behind the curve are moving up modestly here.”
- Bullard (speech, 3/24): “The state of the U.S. economy as of the March 2016 FOMC meeting was arguably consistent with December 2015 SEP projections. Yet, the Committee did not increase the policy rate at the March meeting…he relatively minor downgrades contained in the March SEP suggest that the next rate increase may not be far off provided that the economy evolves as expected.”
- Evans (answering questions after speech, 3/22): “I used to sort of look at these dots and think that they were a bit too restrictive for what I thought was appropriate…I now think that those dots is really a pretty good setting…Currently given my assessment, two rate increases is not at all unreasonable.”
- Kaplan (interview, 3/24): “We want to try to normalize [interest rates] as fast as we can…But we have to be patient and gradual…I am hoping for more evidence that inflation will firm.”