Governor Brainard gave a speech last week reflecting what we see as a general shift on the FOMC, and we expect her dots next week will be marked up (see our commentary).
Policymaker Remarks
A number of policymakers warned of inflationary or financial imbalances unless the FOMC accelerates rate hikes beyond the presumed (median) pace. Rosengren (3/9) linked his support for a pace “a bit faster than three” to “developments since December”—a clear reference to fiscal policy changes since then. He cautioned that the FOMC should avoid a “boom-and-bust” economy and warned that the balance of risks has shifted to the upside: “Unsustainably strong growth that leads to excessive inflation or financial imbalances is now as much a risk as growth that falls short.” George (3/8) echoed these arguments.
Brainard’s speech (3/6) was noteworthy because it marked an apparent shift from her previous reputation as an advocate for more dovish policy than the consensus (link). While she was still cautious about the underlying rate of inflation, our most important takeaway is that she now saw more upside risk than downside risk and even talked about the prospect of an overshoot of the 2% objective. We now believe her dot for 2018 in the March 2018 FOMC projections will likely be at three. Bostic explicitly shifted his baseline view from two hikes to three (3/7), adding that it could be from two to four hikes. He warned that trade protectionism “more generally is often not helpful for the broader economy.”
Other policymakers who are seen as more dovish continued to cite the symmetric nature of the inflation objective to advocate for a slower pace of rate hikes. Evans (3/9) argued, “We need to reduce the percentage of the public that believes the FOMC’s 2 percent objective is a ceiling.” He commented after the employment report that he did not see strong wage growth yet despite a “vibrant” labor market and “very strong payroll growth for many many months.” But he still wanted the FOMC to “wait a little longer” and to be “extremely careful” with rate hikes. Bullard (3/11) argued “You would not have to go very high in this environment to be in a restrictive policy stance” and referred to the low level of the neutral rate. He warned, “If we went too far we would start to put downward pressure on inflation in an environment where inflation is already below target.” He saw hiking four times as only possible in a scenario of “perfection…every single thing has to go right.” But even he acknowledged, “I know I have been dismissive of fiscal policy effects, but I am willing to hedge my bets a little bit.”
George (3/8) drew a link between financial risk and her view that balance sheet normalization was proceeding at a “very slow pace,” whereas Bullard (3/11) saw balance sheet reduction as becoming “more and more forceful.” Brainard, too, wanted the public to keep in mind that “balance sheet runoff is set to reach its steady-state pace later this year” (3/6) in the context of gauging the need for further rate hikes.