Kevin Burgett
Chairman Powell’s speech at Jackson Hole provided a broad defense of FOMC policy while avoiding saying anything that would move markets substantially (see our analysis). He appeared to be comfortable with the near-term outlook as well as the market’s understanding of FOMC policy. Therefore, his comments did not affect our views of the monetary policy outlook. The minutes of the August FOMC likewise indicated comfort with the outlook (see our commentary). Though there was extensive discussion of risks, the outlook clearly remained strong and there had been little change since the previous meeting. The incoming data last week reinforced two trends in private fixed investment: Strength in equipment spending and weakness in housing. Both new and existing home sales declined further in July, while both orders and shipments for core capital goods easily beat expectations.
Policymaker Remarks
The possibility of a yield curve inversion remained of great importance to some policymakers, who now appear to be out of the consensus. President Bostic (8/20) said, “I pledge to you I will not vote for anything that will knowingly invert the curve and I am hopeful that as we move forward I won’t be faced with that.” He continues to see the yield curve as a strong predictor of recession, though he acknowledged that “an inversion does not guarantee anything.” Later in the week he used much less bold language in describing how the shape of the yield curve affects his thinking, however (8/23). He said, “Correlation does not imply causality. This is a particularly important point to keep in mind when discussing the yield curve.” He added that “the yield curve gives us important and useful information about market participants’ forecasts. But it is only one signal among many that we use for the complex task of forecasting growth in the U.S. economy.” President Kaplan (8/21) said, “I do not discount the significance of an inverted yield curve.” President Bullard (8/23) likewise said he takes the signal from the yield curve “seriously,” adding, “There is no reason to challenge the yield curve at this time.”
President Kaplan (8/21) advocated continuing to gradually raise rates until they reached their neutral level, which he described as three or four hikes away. He continued to advocate a pause in rate hikes at that point: “I would be inclined to step back and assess the outlook for the economy and look at a range of other factors — including the levels and shape of the Treasury yield curve — before deciding what further actions, if any, might be appropriate.” He specifically voiced support (8/24) for two more hikes in 2018, in September and December. President George (8/23) said, “My own forecast is that it will be appropriate to raise rates a couple more times this year.”
Raising the countercyclical capital buffer (CCyB) was mentioned in the minutes of the August FOMC meeting, and last week President Kashkari endorsed a call to raise it. Previously, George (7/17), Mester (7/13), Rosengren (6/27), and Brainard (4/19) have expressed openness to raising the CCyB.