Median March Dots for 2018: Three More Likely Than Four

The distribution of the dots for 2018 will move up next week. The distribution of the dots follows the evolution of the forecast; projected growth will be marked up again while the projected path of the unemployment rate will be marked down again. So, the shift in the dots is unambiguous. 

However, we don’t expect the upward shift in the dots to be sufficient for the median to increase from three to four. For that to happen, four of the December dots that were at three or fewer hikes in 2018 would have to move to four or more. We expect a couple of participants will move from two hikes in December to three hikes in March, but this would not affect the median. While we expect a number who were at three will move to four, we think that number will be fewer than four, leaving the median at three. However, some who might have been inclined to move from three hikes to four could be held back by the unanticipated slowing in Q1  growth, from initial tracking estimates near 3% to 2% or below.  

We focus on the participants whom we believe were at three in December and their prospects for moving to  four.  

We believe that Dudley, Williams, Harker, Powell, and Quarles were all threes in December. Dudley, Williams,  Powell, and Quarles are the critical players in this drama, as Kaplan has already told us he remains at three.  We expect that Dudley and Williams will move to four and that Powell and Quarles will remain at three. That would leave eight at three or fewer and seven at four or more, leaving the median at three, but just barely.  One reason why three is more likely as a median is an inertia: if a participant was at three in December, and now is three or four, a close call, he or she might need a further push to go to four. 

Of those we believe were at three in December, we see Dudley and Williams as most likely to move to four in March. Dudley emphasized that four hikes “would still be gradual” (Mar. 1). He also suggested that four  wasn’t even that aggressive as it would only be half the previous tightening cycle’s pace of eight hikes per  year—his so-called “alternative to gradual.” Fiscal actions gave him “greater confidence.” However, his  overheating fears are more about 2019 than 2018 and he warned that whether the better outlook warrants  a faster pace “remains to be seen.” So clearly, three or four. We moved him to four. 

We expect Williams will also move from three hikes to four, and perhaps more likely to do so than Dudley.  Williams warned “if this economy were allowed to run too hot, for too long, we would see further imbalances occur” and when asked about a March hike: “we should be moving ahead with a rate increase relatively soon,  in the near future” (Feb. 23). Also, he speculated that “we’re in the realm of a movement in r* that might be at most a quarter of a percentage point”—which suggests his r-star could shift from 2.5% to 2.75% (nominal)  which would presumably be accompanied by a higher path of the fund’s rate itself. 

No one who was above four hikes would likely drop to three. We expect Barkin, Mester, and Rosengren (who were at four hikes) and George (who was at five) to project a similar pace of 2018 hikes as in December.  Mester, Rosengren, and George are clearly above three. We put Barkin at four in both December and March,  assuming his policy stance continues to reflect the historical hawkish leanings of he inherited the Richmond  Fed. 

That leaves Powell and Quarles. We expect Powell was one of the median three-hike dots in December.  Powell revealed in House testimony (Feb. 27) that he had revised his own forecast for 2018 upward, but so has everyone else, and his Senate appearance (Mar. 1) was a bit more balanced. That shift was likely intentional, suggesting he did want to be seen at that point s saying that four hikes are inevitable, getting ahead of the Committee: “There’s no evidence that the economy’s currently overheating” (Mar. 1).  

It is important to note that the Chairman, unlike any other participant, gets to peek at the other dots before putting in his or her own. If there is a solid consensus, the Chairman will join it. However, if it is a very close call between two options, the Chairman can effectively set the consensus. So, the median may be a question of tactically where the Chairman wants the median to be! Reinforcing this, we see Quarles voting with Powell because Quarles is a Vice Chairman for Supervision (that is, not as focused on rate policy) and a relatively new member of the FOMC.  

If Powell and Quarles stay at three hikes, it strengthens the consensus at three rather than moves the consensus definitely to four hikes. The case for keeping the median at three when it is a close call between three and four is that the outcome would still carry the desired message: The consensus is at three, but leaning toward four. In addition, a three-hike median in March would not prevent actually hiking four times,  but a scenario in which the median moves to four in March and later is forced by circumstances to move to three would be more uncomfortable. The market is already expecting slightly more than three; there’s no urgent need at this time to raise that expectation. Strategically, at his first meeting and press conference, we expect that Powell would prefer not to signal a change from the consensus for the last few meetings, and instead project more continuity than change to ensure a more gentle market reaction than would be the case if the median moved to four.  

Policymaker December  2017  (Inference)March 2018  Range  (Expectation)March 2018  Point  (Expectation)
Powell 3 or 4 (Feb. 27. Mar. 1 Testimony) (Mar. 1: “There’s no evidence that the economy’s currently  overheating.”)
Quarles 3 or 4 (Equals Powell)
Brainard 2 or 3 (Mar. 6 Speech)
Rosengren 4 or 5 (Jan. 12: “It’s more than three.”)
Dudley (Mar. 1: “If you were to go to four 25bp rate hikes I think it  would still be gradual.”  “Whether [a better outlook] necessitates a faster pace of  tightening, I think that remains to be seen.”)
Harker (Feb. 21: “I’ve penciled in two hikes for 2018.”)
Mester (Jan. 18: “Three to four fed funds increases this year, three to  four next year.” Feb. 13: “There’s more salient upside risks to the forecast than  we’ve seen in quite a while.” “I expect the short-run neutral rate  to move up over time as the expansion continues.” “I put a  quarter to a half percentage point on extra growth from those  over this year and next year — given what I’ve seen so far in how  people have said they’ve reacted to the tax cuts. I think it  potentially could be bigger than that, so that’s an upside risk to  the forecast”)
Richmond  Fed (Dec.) Barkin (Mar.)3 or 4 4
Bostic (Mar. 7 comments)
Evans (Feb. 7: “With the data I see today, my policy strategy would be  to keep policy on hold until mid-year or so in order to assess the  incoming inflation data.”  “Suppose inflation picks up more assuredly, as many expect.  Then, we still could easily raise rates another three or even four  times in 2018 if that were necessary.”)
Bullard (Feb. 26: “Forward guidance should be characterized by a  relatively flat policy rate path.” Mar. 12: “I know I have been dismissive of fiscal policy effects,  but I am willing to hedge my bets a little bit and move a little bit  in response to that.”)
Kashkari (Feb. 28: “We should allow this to continue to run.” Wants wage  growth and inflation improving before hikes. “The math says we  should be able to tolerate 2.5 percent for five years.” Mar. 4: “I am sympathetic to the desire for fair trade but I am  nervous that there will be economic cost to the US economy in  trying to show that the threat is credible.”)
George (Feb. 8: Three hikes is a “reasonable baseline unless the outlook changes materially.”)
Kaplan (Mar. 6: “My base case, as you’ve heard me say, hasn’t changed.  It’s three for this year.”)
Policymaker December  2017  (Inference)March 2018  Range  (Expectation)March 2018  Point  (Expectation)
Williams 3 or 4 (Feb. 23: “Based on how the economy is doing, where I see it  going, it makes sense to think about three to four rate increases  in 2018.” If this economy were allowed to run too hot, for too  long, we would see further imbalances occur.”)
Yellen n.a.
16 15 15
MEAN 2.7 3.1
Number of 2018 Hikes Policymakers  (December 2017)Policymakers  (March 2018)
2 Bullard Kashkari0
2 Bullard Kashkari
4 Brainard Evans Bostic Harker2 Evans Harker
6 Dudley Powell Yellen Kaplan Williams Quarles5 Powell Kaplan Quarles Brainard  Bostic
3 Mester Rosengren Richmond Fed5 Mester Rosengren Richmond Fed Williams Dudley
1 George1 George

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