The impact of ongoing trade negotiations continued to concern policymakers, but they pointed out that those concerns should be weighted in the context of an outlook that is otherwise strong.
Market participants paid close attention to Evans’ remarks, as some of his comments could have been interpreted as being more hawkish than anticipated (Aug. 9). This reaction was likely a result of his comment that “It would not surprise me at all if we make a judgment to move to a somewhat restrictive setting,” which also contrasts with his dissent to the December rate hike. (His r-star estimate is 2.75%.) He sees one or two more rate hikes this year as appropriate. He characterized an unemployment rate of 3.9% as merely “a little bit below” an estimated NAIRU around 4.3% and “nothing of concern.” He expected a further decline in the unemployment rate to 3.5% by 2020. His uncertainty bands on NAIRU estimates are 2pp on each side. He expected inflation to continue to fluctuate in the range of 2-2.2%—“not expecting it to get as high as 2.5.” Importantly, he saw prevailing inflation expectations as “a bit lower” than desirable, but was hopeful that they would catch up as a result of stronger growth. Therefore, “only a modest amount of restrictiveness” above r-star “might be called for in 2020.”
The prospect of a yield curve inversion continued to trouble Bullard, who called it “the lead issue right now” (Aug. 6). He cited it as a strong predictor of recessions. He saw an inversion as possible after two more rate hikes: “If the Fed raises rates 50 basis points and the 10-year does not cooperate.” He also interpreted yield curve behavior as suggesting “the whole structure of rates is just lower today,” touching on Powell’s view that the yield curve might signal the neutral rate being low. Bullard also argued that the long duration of the current expansion should not be regarded as a sign of an impending recession.
The credibility of the Fed’s inflation objective continued to be of central importance to Barkin, who is reputed to be a more hawkish policymaker (Aug. 8). In his view, current circumstances mean “It is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target.” Nonetheless, his remarks after his prepared speech suggested he would find the most recent SEP median path acceptable, citing data dependency: “It is easy for me to imagine that we will get to a place where we will want to pause a little longer and look around. It is also easy for me to imagine that we will continue on the pace. It depends a lot on how the data comes out.” He added, “I think the gradual path we are on seems like a sensible one to me and I am supportive of it, which I describe as raising rates at a measured pace and looking around and seeing what you see in the data.”
Barkin observed: “Tariff concerns are making people more nervous than they did a few months ago…We’ve also got supply chain constraints, geopolitical instability, market volatility and the potential effects of higher interest rates. At least for now, though, businesses and consumers seem to be looking through these risks.” Bullard noted: “The companies I talk to … are very concerned about the trade situation and it’s certainly top of (the) mind for everybody. But at the same time their businesses are doing very well, so there’s a bit of a conflict between whether they think they should go ahead and invest or whether they should wait and see how the trade situation evolves.” Evans thought that “the magnitude still seems to be relatively small, uncertain, against a context where the economy is very strong and we have just added quite a lot of fiscal stimulus.”