There were remarks by three presidents this week: Dudley, Kaplan, and Williams. Again there is evidence of the split that we have been talking about. Williams was optimistic about both growth and the return of inflation to 2%. Dudley was more cautious about growth, his assessment being that risks to economic activity are now tilting to the downside and that there is an increased risk that inflation could be on a slower trajectory to 2%. Kaplan, like Dudley, was concerned about the tightening in financial conditions. He sees that tightening as equivalent to some increase in the funds rate. In our view, Dudley and Kaplan’s comments are a better indicator than Williams’ of what the mood is likely to be at the March FOMC meeting. However, Williams captures the still-cautiously optimistic attitude of participants regarding the medium-term outlook, which underpins the Committee’s assessment that the appropriate course of policy remains a gradual normalization of rates. It’s simply about how slow gradual is!
- Dudley (speech on 2/29): “I am somewhat less confident than I was before.” “I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside.” “The return of inflation to [the 2% objective] may be slower than I earlier anticipated.”
- Williams (interview on 3/1): He continued to be upbeat and saw strong domestic growth outweighing external risks: “I don’t see any signs in the data of any slackening of domestic demand.” He pointed out that underlying inflation had already started ticking higher. “There is a risk over the next few years that if we allow this economy to run too hot for too long, we just know what happens.”
- Kaplan (speech on 3/2): He said the Fed is still assessing how financial market developments and slowing global growth could affect the domestic outlook. “Global financial conditions have tightened. This tightening is likely to have had a restraining impact on the underlying pace of economic activity akin to some level of increase in the fed funds rate.” “At this juncture, the Fed needs to show patience in decisions to remove accommodation.”
- Williams (speech on 3/2): He echoed his thoughts from earlier in the week, noting that the labor market is showing good momentum.
The Bottom Line
The talks this week simply reinforce the obvious: There will be no move in March. The data between now and June will lead to some convergence between the more hawkish participants, like Williams, and the more dovish ones, like Dudley and Kapla