Five policymakers spoke last week: Rosengren, Bullard, Mester, Williams, and new Minneapolis Fed President Kashkari.
Themes and Interpretation
The overall theme is a split among participants. There was less of a split with respect to the assessment of economic activity and labor markets than about inflation prospects, the stability of inflation expectations, and the appropriate course of monetary policy. Mester and Williams said they had not altered their forecasts, and Bullard said growth and labor market prospects remain reasonable. Rosengren, on the other hand, was more cautious, saying that recent developments “could result in slower growth.” Second, there was more disagreement about whether the recent further decline in oil prices and appreciation of the dollar, in addition to the prevailing low inflation, suggest a slower rise to 2% than earlier anticipated. There was also a clear split among the speakers with respect to whether inflation expectations are “relatively stable” (Mester) or showing signs of slippage (Rosengren and Bullard). Williams did not address this, but I suspect his view is closer to Mester’s. These differences were reflected in views of appropriate policy. Bullard and Rosengren appeared positioned not to support a March rate hike, in a “wait and see” posture that would likely extend beyond the March meeting. Mester and Williams, on the other hand, appeared more inclined to continue a gradual pace of normalization, but they did not say whether or not their definition of gradual might have changed as a result of heightened risks, if not a change in their baseline forecasts.
Key remarks in FOMC participants’ communications last week
- Rosengren (2/16 speech): The slowdown among trading partners, decline in global stock prices, and strong U.S. dollar could result in slower growth. This, along with a decline in oil prices, suggests it may take longer to get back to 2% inflation. As a result, “I believe the normalization of monetary policy should be unhurried, and wait for economic data to improve.”
- Bullard (2/17 speech): He expects growth to be stronger than last year and labor markets to continue to improve. But he regards it as “unwise to continue a normalization strategy in an environment of declining market-based inflation expectations.”
- Kashkari (2/17 interview): “We have to keep driving unemployment down, keep bringing people [into] the labor force. That’s how we’re going to get wages up and get inflation back to our 2 percent target.”
- Williams (2/18 speech): His “overall outlook for the U.S. and the global economy remains unchanged” and he expects “inflation to move back to 2 percent over the next two years.” He continues “to see a gradual pace of policy normalization as being the best course.”
- Mester (2/19 speech): She sees market volatility and the sharp drop in oil prices as posing a risk to the forecast, but she believes “it is premature to conclude they necessitate a material change in my modal economic outlook.” Inflation expectations have been “relatively stable,” but it will be “important to continue to monitor inflation developments, in particular inflation expectations.”
The Bottom Line
We see the communications last week as indicating a split among those who think all looks good with respect to progress on achieving the dual mandate and those who are more concerned about downside risks, especially about inflation and, most importantly, about possible slippage in inflation expectations. On balance, the communication did not change our expectation that there will be no hike on March, there will be a slower pace than earlier anticipated (only 2 hikes this year), and that a June hike would depend on the data and evolving forecast. We believe the data will support a hike in June, but in the context of a Committee now leaning toward a slower pace for 2016 than was reflected in the December dots.