Some speakers favored a move this year because of the proximity to full employment and the risk of having to go faster later if the FOMC does not raise rates soon; others said that, while they believed the economy has running room, they still supported one hike this year. Their arguments were conditional on the data coming in as they expected. This is consistent with our view that some in the patient camp will join the consensus that we expect for a hike in December because they are more concerned with the pace of hikes thereafter than whether or not there is a rate hike this year.
Harker, who is among the more hawkish participants, said he was “still supportive by the end of the year of having one rate move,” pointing to the progress in the labor market. Rosengren, who dissented in September and continues to support a hike this year, noted that the economy is “very close to full employment.” He added: “At this point, I’m as concerned about overshooting on what is a sustainable unemployment rate. I have to be concerned about whether if we did overshoot significantly on the unemployment rate, whether we would end up tightening much faster and possibly shortening the recovery.”
Dudley, on the other hand, favored continued accommodation that would be sufficient to lower the unemployment rate below the NAIRU: “You certainly want to go as far as you can [to grow the workforce]…You don’t want to keep people unemployed just because you think you’re already at the full employment rate.” He repeated Yellen’s “running room” hypothesis, arguing that “We’re at a point where the economic expansion has plenty of room to run.” Nevertheless, Dudley also said that, “if the economy continues to evolve along the path that we expect, I expect that we’re going to be raising interest rates relatively soon,” and added that “relatively soon” meant “this year.” That appeared to be a prediction of what the FOMC would be inclined to do rather than an indication of his support for such a move.
Yellen repeated her view that, if there is a threat of hysteresis, then “one can certainly identify plausible ways” by which temporarily running a “high-pressure economy” could reverse adverse supply effects. For us, this speech was neutral with respect to our FOMC calls. (Link to our commentary.) Yellen had already indicated at the September press conference that she was part of the one-move consensus in the September dots for 2016.
At the conference hosted by the Boston Fed, Rosengren repeated his concern about financial stability risks, particularly related to valuations in commercial real estate. This is part of why he supports a rate hike this year. However, he floated a novel idea about how the FOMC might use monetary policy to temper an emerging asset bubble, adjusting the Fed’s balance sheet composition: “If one were concerned about the historically low 10-year Treasury and commercial real estate capitalization rates, perhaps because of potential financial stability concerns, the balance sheet composition could be adjusted to steepen the yield curve.” This has some similarity to the Bank of Japan’s recent “QQE with Yield Curve Control.” In the case of the BOJ, they were seeking to avoid further flattening of the yield curve (link to BOJ commentary). We very much doubt this will get much traction inside the FOMC.
Kashkari added his name to the list of participants who have said, in one way or another, that the composition of the labor force should be taken into account in the conduct of monetary policy: “We cannot have confidence we are achieving maximum employment if we don’t understand what’s happening beneath the surface…Understanding the composition of maximum employment is actually very important to us achieving the mandate that Congress has given us.