The following FOMC participants spoke, all before the employment report on Friday: Harker, Kaplan, Kashkari, Evans, Powell, and Lockhart. We saw three themes. First, while some members continued to say that September is on the table, they didn’t seem to be very convincing. Second, participants had somewhat different preconditions for the next hike: improvement in the labor market or more confidence in a firming of inflation. Third, there was the continuing challenge of managing monetary policy as a result of ongoing declines in the short-run and longer-run equilibrium funds rates.
Kaplan said that September “is very much on the table, but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion.” Lockhart said much the same thing: “At this point, I don’t rule out a rate increase at the next meeting or later in the year. We just have to wait and see how the data come in.” He also said: “The situation is maybe a little bit ambiguous, but I can imagine conditions in which we could have a rate hike.” Powell said (before the strong July employment report came out), “I need to see two really good employment reports.” Well, one down, one to go. But he followed with, “And then it is a conversation. I wouldn’t be pounding the table saying we really need to raise rates.” So we got: maybe, but data dependent; can imagine, never say never; and could be dragged along to join a consensus. None of these are enthusiastic endorsements of a potential September hike.
Powell and Evans talked about the potential for one rate hike this year, rather than a September rate hike. Dudley said “It is premature to rule out further monetary policy tightening this year.” That’s basically in what we call the “I can imagine” camp, but with respect to a hike this year rather than one specifically in September. And Evans said: “I do think that perhaps one rate increase could be appropriate this year…even if I would prefer none until we saw inflation much more strongly.” He said, in our interpretation, that he could be pulled along to support a rate hike as part of Yellen’s strategy of a gradual and cautious pace of normalization, though he would prefer no rate hikes this year.
FOMC participants tied their individual views on rate hikes to what developments would warrant a rate hike. Harker said that, “If financial headwinds dissipate quickly and inflation picks up a bit, we will need [a] slightly more aggressive approach to policy.” But he followed this with: “Economic fundamentals are sound, and our financial system is in good shape. The main indicator is the labor market. We are seeing robust hiring.” Headwinds from financial headwinds have dissipated quickly and the labor market has continued to improve.
Kashkari, Evans, and Powell, on the other hand, are focused entirely on inflation as the key precondition. Kashkari represented those participants who believe still-low inflation provides an opportunity to remain patient: “When I look at the data I don’t see much inflationary pressure,” so the FOMC has “the luxury of time.” Powell also told the Financial Times that, “With inflation below target, I think we can be patient.” Evans said that “The real economy is doing quite well in the U.S., especially given all of the headwinds that we’re facing, the uncertainty from abroad.” But he still focused most on inflation: “We ought to get to a point where the probability that inflation is above 2% is somewhat higher than the probability that we are going to continue to under-run it. One way to do that is if we sort of go through 2% a bit.”
Powell’s remarks during his interview last week were by far the most interesting, wide ranging, and darkest remarks last week. He brought up the specter of secular stagnation: He was reported as saying that there is an increasing risk that the U.S. economy has become trapped in a period of subdued growth that requires lower official rates than was previously expected. He seemed to go beyond lower potential growth, focused on the demand as well as the supply side of the equation, and appeared to say that the short-run real equilibrium funds rate must be very low because of the unique headwinds facing the economy. Still, Powell was reported to have said that Summers’ theory of secular stagnation is not his “baseline” expectation. He also said, as he had previously, “I don’t think that process [the gradual decline in participants’ median estimate of the longer-run equilibrium rate] is over.” This may presage an imminent further cut in participants’ median estimate of the “funds rate in the longer run,” which, in turn, would likely lower their estimate of the short-run equilibrium rate. Kaplan remarked that: “In light of the decline in the neutral rate, using monetary policy to help manage the economy has become more challenging.”
We are also keeping track of comments by participants on the effect of the presidential election on monetary policy decisions. Powell was reported as saying that the White House race could put a chill on growth.