This Week in Fedspeak recaps how dovish or hawkish each speech and interview was based on both our qualitative and quantitative assessments and outlines how our monetary policy call has changed.
- Last week was busy with seven Fed officials speaking; the chatter was more consistent with 3 hikes in 2016 than with 4.
- Concern about inflation expectations slipping appears to be growing, and speakers emphasized that actual inflation is the key to the number of moves we can expect in 2016.
- Global risks are back on the table, but policymakers said that domestic growth fundamentals are favorable and point to 2% to 2½% growth; this is enough to keep the unemployment rate falling and justify continued rate hikes in 2016.
Our Judgmental Assessment of Themes
The outlook for growth, labor market conditions, and inflation continues to support a gradual pace of 3 or 4 moves this year, but the FOMC needs to see signs that inflation is on an upward trajectory before continuing to raise rates after March—if it does raise rates in March. Additionally, increasing concerns about global risks and inflation expectations are tipping the scale toward 3 moves, not 4.
Takeaways from key speeches
- Kaplan (January 11): Thinks the idea of four hikes in 2016 (from the median dots) is not “baked in the cake” and feels that China and global financial markets pose potential concerns.
- Lockhart (January 11): Perceives inflation expectations as well-anchored, but will look for hard evidence in the inflation data to confirm expectations that actual inflation will return to 2 percent.
- Rosengren (January 13): Believes unemployment might have to fall below the NAIRU for inflation to get to 2% in the next few years.
- Bullard (January 14): Sees the possibility of lower oil prices passing through to actual inflation through falling inflation expectations and suggests that policymakers might not want to treat oil shocks as only temporary.
- Evans (January 14): Is nervous about inflation expectations not being as firmly anchored as policymakers thought and is concerned about downside risks from a China slowdown.
- Dudley (January 15): Thinks the outlook remains good, but is concerned about inflation expectations becoming unanchored to the downside.
- Williams (January 15): Sees the need for a very gradual removal of accommodation because the economy is not at its strongest yet and faces risks from abroad.