All the speakers last week—Jim Bullard, Charlie Evans, John Williams and Patrick Harker—supported a December rate hike, though only Williams and Harker set out a strong case for doing so. Still, all four are part of the strong consensus for a hike in December. Bullard and Williams noted that, while the increase could come in either November or December, the Committee’s clear preference for actions at meetings with a press conference pointed decidedly to December. We agree.
Bullard set out his policy rule to explain why he thought only one rate hike would be appropriate through 2018. He noted the two “gap” terms in the policy rule should essentially be dropped today because they are close to zero. So the prescribed funds rate is pinned down by his estimate of r-star. He takes r-star as equal to the one-year Treasury yield minus inflation over the last year, -1.34%. Adding the 2% inflation objective leaves him with a nominal prescribed funds rate of 66 basis points, warranting only one additional move over the next two or three years. Somehow that translates into support for a rate hike this year: “I would support a rate increase at an upcoming meeting. It doesn’t have to be any particular meeting, according to the way we are looking at it.” He added: “The committee has not wanted to make key decisions at meetings that don’t have a press conference, so that suggests December is the most likely juncture.”
Williams supports one rate increase this year and “it could happen at either of the two remaining [FOMC] meetings in 2016.” But, like Bullard, he said:”It think there are some advantages, in my mind, around [a meeting with] a press conference.” As a result, the best time would be in December. Also, “we do need to keep moving on raising interest rates and faster than one increase a year.”
Harker said that he agreed with the dissenters at the September meeting and offered the view of the ready to go camp: “there are risks of hanging around zero too long. And if the economy can withstand it, I think it’s appropriate to move.”
Evans, while supporting a December rate hike, focused on why he believes the path of the funds rate should very shallow. First, there is “still room for the economy to grow before inflationary pressures emerge in a way that might be troubling.” This is the running-room argument, favored by the patient camp. Second, he said that there is a need to “demonstrate a commitment to achieving an inflation target sustainably, symmetrically, and sooner than later.” Heeding the logic of a symmetric inflation objective, he said that achieving that might “require undershooting the [NAIRU] and overshooting the inflation target.” Third, a low r-star means there is “less headroom to increase rates.”