While Chairman Powell speech (4/6) on the economic outlook was the highest profile of public remarks by monetary policymakers last week, his evenhanded remarks were clearly intended to avoid any market response, and they didn’t change our view of the outlook for monetary policy (see our commentary). His description of the balancing act the FOMC faces seemed to downplay the difficulty of achieving a soft landing with an economy already essentially meeting the dual mandate and set to receive a substantial boost of fiscal stimulus.
President Williams (4/6), newly announced as the successor to Dudley as New York Fed president, conveyed a greater sense of urgency in describing monetary policy: “We need to continue on the path of raising interest rates” to prevent overheating, he said. He noted that job growth in 2017 was “about twice the number needed to keep pace with normal labor force growth” and that “strong financial conditions, better-than-expected global growth, and fiscal stimulus of lower taxes and higher spending have all created tailwinds.” Williams (4/6) reiterated his support for “three or four” hikes this year. He expected 2½ percent growth this year and next and said, “I expect that we’ll see inflation reach and actually slightly exceed our longer-run 2 percent goal for the next few years.
Governor Brainard (4/3) provided an update on the Fed’s financial stability agenda, noting that, “Despite elevated asset valuations, overall risks to the financial system remain moderate in no small part because important financial reforms have encouraged large banking institutions to build strong capital and liquidity buffers.” However, she warned “that a booming economy can lead to a relaxation in lending standards and an attendant increase in risky debt levels.” She specifically addressed the risks presented by “pro-cyclical fiscal stimulus at a time when resource constraints are tightening and growth is above trend.” Episodes of very low levels of unemployment have “tended to see a risk of accelerating inflation in earlier decades or a risk of financial imbalances in more recent decades.”
In their remarks last week, many policymakers acknowledged the market volatility as the ongoing trade dispute between U.S. and Chinese escalated. There was a sense that associated risks may have increased, but policymakers indicated quite clearly that trade considerations–including market reactions to-date–are not affecting their baseline outlook for monetary policy. President Williams (4/6) said, “So far, the kind of things that have been happening about specific actions — they don’t add up to a huge effect on the economy.” His concern was about a potential escalation, which “could have some pretty negative repercussions.” President Bullard (4/4) said that, “In recent days, we are talking about more generalized tariffs between us and China. That is a more significant development” than the narrower tariffs on steel and aluminum originally announced. He expected “a bumpy ride for all of us as these negotiations proceed.” President Bostic (4/5) said he’s taking a wait-and-see approach to trade, saying, “The tweets come out fast. We would be churning all the time” trying to incorporate every new potential action.
Bullard (4/4) reaffirmed that he doesn’t see a need for the FOMC to raise rates further, saying, “Current monetary policy settings are close to neutral, which is appropriate for the current macroeconomic situation.” Fellow dove Kashkari (4/3) likewise said “we’re probably pretty close to neutral right now.”