Kevin Burgett
Last week, Richard Clarida was nominated to be Vice Chairman of the Board (Clarida: Completing the Troika). He has questioned participants’ projections of an unemployment rate falling further below the NAIRU without inflation overshooting the 2% objective and the funds rate moving above its neutral level. While participants’ projections moved in this direction in March, we still place him to the hawkish side of center. Michelle Bowman was also nominated to the Board, as the community bank governor.
Policymaker Remarks
President Williams’ (4/17) remarks on the potential for a yield curve inversion raised some eyebrows, though we saw them as broadly consistent with remarks he’d previously made. He said that a truly inverted yield curve “is a powerful signal of recessions,” and that they have occured “when the Fed is in a tightening cycle, and markets lose confidence in the economic outlook.” However, he expressed little concern at this point: “The flattening of the yield curve that we’ve seen is so far a normal part of the process, as the Fed is raising interest rates, long rates have gone up somewhat — but it’s totally normal that the yield curve gets flatter.” Later in the week, he emphasized his lack of concern and said he expected the yield curve to steepen, with the rundown of the Fed’s balance sheet contributing. President Evans (4/20) said “The yield curve is not nearly as much of a concern as I might have pointed to a couple months ago.” He expected greater U.S. issuance to lead to a steeper curve.
Several other policymakers expressed more concern. President Kaplan said, “The flat yield curve tells me the bond market sees sluggish economic growth in the medium term and I for one do not want to be in the position of raising the fed funds rate and creating an inverted yield curve.” President Bullard (4/18) probably expressed the most alarm, saying, “I’m getting concerned over the flattening yield curve. If the committee pushes ahead here and longer rates don’t cooperate, we could have an inverted yield curve within six months.” President Kashkari (4/20) saw the flattening of the yield curve as a “signal of caution” indicating that the funds rate is not far from its neutral level.
Policymakers continued to discuss the prospect of a trade war as a risk to the economic outlook, but there didn’t appear to be an increase in concern. The view remained that a full-out trade war would be very disruptive, but that “even the uncertainty about a trade war, or a significant pullback from globalization in terms of open financial and economic markets, can have a negative effect through the standard policy uncertainty channels” (Williams, 4/17). Governor Brainard (4/20) said an escalation “could get us into a more complicated situation — that could affect global confidence, but that’s not where we are today.” Presidents Williams and Dudley referenced the potential effect on prices of tariffs. Williams said, “I definitely don’t want a supply-side driven increase in inflation,” given that “We are now essentially at our 2 percent goal.” Policymakers also continued to make the case for international trade to the public. President Kaplan said that “globalization is more likely an opportunity for the U.S. to grow as opposed to a ‘threat,’” making the case that the public seems to attribute to globalization negative effects that are actually related more specifically to “technology-enabled disruption.”
Policymakers also discussed the potential for an inflation overshoot and the FOMC’s response. President Dudley (4/16) saw a gradual pace of three or four hikes this year as reasonable and said that, “As long as inflation is relatively low, the Fed is going to be gradual.” He added that, “if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.” President Evans (4/17) likewise said, “I don’t think 2.25 (percent) is something to get our nose out of joint over,” though he didn’t expect an overshoot of even that much. President Williams (4/17) said he expected inflation to reach its objective this year and to be at or above two percent “another couple of years.” Kaplan (4/18) said his “base case” is three hikes this year.