We read the minutes of the October-November FOMC meeting as somewhat dovish. Given our forecast, we’re still comfortable with three hikes in 2018. But both the apparent greater concern of the FOMC about downside risks to inflation and relatively subdued concern expressed about potential overheating make us see less risk of four hikes.
As we expected, Yellen won’t continue serving once Chairman Powell is sworn in (expected to be February 2018, which is after the first FOMC meeting in 2018). Unless President Trump nominates and the Senate confirms more governors soon, there will only be three remaining in February.
Other than the FOMC minutes, there was not much in the way of FOMC communications ahead of the Thanksgiving holiday. On a panel discussion, Yellen reiterated her view that the economy faced risk on both sides: She doesn’t “really think [inflation expectations have] drifted down very much…it can be quite dangerous to allow inflation to drift down and not to achieve over time a central bank’s inflation target.” On the other hand, “If we remove policy accommodation too rapidly, well, in the extreme, that could cause a downturn in the economy.” She also pointed out that the FOMC has lagged the market in revising down r-star: “We have been revising down our estimate of this longer-run normal rate of interest and market participants have been doing the same. They may even be a little bit ahead of us.”