Not much data, but the markets were on edge about a September rate hike, and equities fell sharply, reportedly spurred by remarks by Rosengren that we, at least, have heard before. Another factor that put markets on edge was the announcement that Governor Brainard would give public remarks and participate in a panel discussion today. The markets suspected that she had been tapped by Chair Yellen to provide an unexpected message that a September rate hike was likely. Is Brainard the messenger? Not likely. (Click here for our commentary.) Brainard as the hawk is even less likely, Other than that there were remarks by a couple of presidents who were “ready to go,” but we doubt they actually thought two moves this year would be appropriate. Tarullo identified himself as a “show me the inflation” kind of guy. Really, there was nothing to change our views: 25% probability for September and 70% by December.
Last week we got another sign of the split between those who believe we are close to meeting the dual mandate (Williams and Rosengren) and those who are not convinced that inflation is heading to 2% and want to be convinced by the data (Tarullo) . For example, Williams said “We’re at full employment, and inflation is well within sight of and on track to reach our target.” Rosengren said that “Given how near the U.S. economy is to reaching the Federal Reserve’s dual mandate from Congress (stable prices and maximum sustainable employment), it is reasonable to ask whether the current degree of monetary policy accommodation–historically low interest rates–remains necessary.”
Williams and Rosengren both argued for a continuation of gradual normalization. Rosengren: “My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.” Williams: “The punch line is that the economy has climbed back to full strength, and it therefore makes sense to move monetary policy gradually back to normal.” We put Rosengren and Williams in the “ready to go” camp, but still among those who would be satisfied with one hike this year. Whether the hike comes in September or December matters far less than the very slow pace after that.
But Tarullo countered that the labor market has been basically flat and inflation has only ticked up. He identified himself as a member of the “show me the inflation” camp: “What is optimal right now is to look to see actual evidence that the…inflation rate would continue to go up and would be sustained around the target.” He signaled he is willing to be patient as a result, but “wouldn’t foreclose that possibility” that rates could go up before the end of the year. We suspect that he will oppose a hike in September but hold out an olive branch to the “ready to go” camp, in that he could support the consensus if the Committee wants to move in December,
Kaplan staked out a middle ground. He said that inflation was making ”frustratingly slow” progress toward the FOMC’s 2% goal, but he said he expected inflation to gradually get there. He said, “”I think the markets have gotten plenty of notice that we are looking for opportunities to remove accommodation” and that “”I think we are just going to have to debate this out over the next few months as to what the appropriate next steps are.” Doesn’t sound like a September-hike guy. But his emphasis was less on when than on the need for the FOMC to raise rates only very slowly.