Seven policymakers spoke last week on topics related to the outlook and current monetary policy: George, Kaplan, Fischer, Williams, Bullard, Mester, and Brainard.
Themes and Interpretation
The overriding themes were that, regardless of whether or not there is a hike in March, the policy direction is still one of gradual normalization of rates and that the pace of normalization is data dependent. The talks and interviews reflected the split on the FOMC about whether and how much the data had fundamentally altered the outlook. For some, nothing had changed with respect to their outlook. This camp appeared to favor the continuation of normalization, including in March. However, we sense that they did not have the very hawkish view that the FOMC should absolutely go in March, but rather they had a preference for a move in March, and absolutely believe March should be “on the table.” We suspect that this camp might be satisfied with a very strong emphasis in the March statement and at the press conference that the Committee continues to see gradual normalization as appropriate, but at a pace determined by the data. The second camp had a dimmer view of the outlook that put them squarely in wait-and-see mode, definitely leaning against a March hike. However, we see them still wanting the same message to be delivered in the case of a delay: the Committee supports a policy of normalization at a pace that is data determined.
Key remarks in FOMC participants’ communications last week
- George (2/23, speech): “At this point I would not say that the data have suggested there has been a fundamental shift in the outlook.” “[A March hike] absolutely should be on the table.” “It is clear the markets have taken [a March hike] off the table.”
- Fischer (2/23, speech): As he usually does, played the role of explainer for the FOMC, even quoting Yellen directly at points, and gave no clear signal about the March decision. “It is still early to judge the ramifications of the increased market volatility of the first seven weeks of 2016.”
- Kaplan (2/24, remarks to reporters): Similar to last week’s remarks. “It wouldn’t be surprising to see in my submission some slowing, or some change in the path.” Reiterated his view that the Fed should be ”patient” and “cautious” in assessing further data.
- Lacker (2/24, speech): Did not directly talk about his views on the outlook or prospective monetary policy. The theme was what monetary policy can do (control inflation through process of money creation), what it has no ability to achieve (faster growth on average), and what it has limited ability to achieve (stimulate aggregate demand in pursuit of full employment).
- Williams (2/25, remarks to reporters): Emphasized “following the same strategy” of a gradual pace of normalization, with the pace of increases “driven by the data.” “We get caught up too much in should we raise in March or June or not or either.” His tone was a bit different than last week. It suggested to us a preference to hike in March, but a willingness to go with the flow.
- Bullard (2/25, remarks to reporters): A change in tone from his previous remarks, in which he clearly suggested he was opposed to a March rate hike. “One of the things I want to do is get away from trying to predict how many increases there’s going to be in a year. We want to be data dependent and I think we want to better coordinate with markets on the idea that you know, we will move, but we will move on good news about the U.S. economy.”
- Mester (2/26, speech): “Whether we increase or not in March, that’s going to depend on the data, but my forecasts, and the risks around those forecasts, suggest we still want to see gradually rising rates.” Her tone was also a bit softer than in her last talk and also suggests she is willing to go with the consensus in March.
- Brainard (2/26, speech): Still clearly on the dovish side of the FOMC. “This deterioration in inflation expectations and a weakened link between labor market tightening and inflation–together with the asymmetry of policy in the vicinity of the lower bound–lead me to put a high premium on evidence that actual inflation is firming sustainably.” Most telling is that she said that the tightening of financial conditions “is the equivalent of an additional increase of over 75 basis points in the federal funds rate.”