The story last week was the FOMC minutes and comments from Williams, Lockhart, and Dudley. The data were a sideshow. The minutes indicated that the sentiment of the Committee was much more hawkish than appeared to be the case from reading the April statement and listening to the April press conference. The message was that policy is data-dependent, of course, but if the data come in as expected, a June rate hike is “likely.” But the Committee noted that there are obstacles, including the possibility that they would not have enough data on Q2 spending to confirm their expectations of a rebound and the risk that Brexit uncertainty could result in enough market volatility to persuade the Committee to wait until July. In any case, the market-implied probability of a June rate hike increased from about 5% to over 30% last week. We raised our subjective probability for a June hike to 40% and for a hike by July to 55%. We are preparing our next forecast, and our preliminary take is that our forecast will be little changed. We are still in a 2% economy, with the unemployment rate poised to fall below the NAIRU and inflation headed to 2%.
A big week on the Fedspeak front. There was nothing but hawkish rhetoric, following the hawkish FOMC minutes. The minutes revealed that most participants were inclined to raise rates soon, “likely” in June if the data between now and that meeting come in as expected, there is enough data to confirm expectations, and Brexit risk does not lead to material financial turbulence. We believe it would have been better for these inclinations to have been revealed in the April statement, or at least at the press conference. We had thought that the too-low market probability of a June hike would be an obstacle, but the minutes got the market’s attention and policymakers have been fulfilling the mandate in the minutes to communicate clearly with the markets. Williams remained aggressive in his openness to two or three hikes this year and pointed out that June “is a live meeting.” Lockhart escalated his views by revealing that he sees “possibly three” hikes, depending on the data. Dudley said in a press briefing that, if the economy evolves as he expects, “I think a tightening in the, you know, in the summer, the June-July time frame, is a reasonable expectation.” He added, “In terms of the Brexit issue, I mean obviously that’s another variable in the mix. The meeting concludes a week before the Brexit vote, and so, you know, there’s a possibility of an event a week later that could potentially have consequences for financial market conditions, and so we’ll have to think about that in terms of weighting whether it makes sense to go in June or wait a little bit later.” Lacker was unsurprisingly hawkish, saying he would have supported a hike in April, and was clearly ready to support a hike in June. There was even a hint that he wanted to catch up to the number of hikes reflected in his March dots, given that his forecast had not changed!