Last Week in Fedspeak
Nine FOMC participants spoke last week, with many speaking while attending the Jackson Hole conference. Many of them spoke multiple times. The most prominent remarks came from Yellen. [See our recent commentary on this topic.] Most participants left the door open for a September hike, while others leaned in that direction. But all emphasized data dependency, recognizing that the employment report this Friday could either move them toward September or encourage them to hold off until December.
Yellen offered two policy signals, although she was focused on the question of the day—whether the central bank toolkit had to be expanded to deal with the challenges of a low r-star world. When she said that “the case for an increase in the federal funds rate has strengthened in recent months,” she placed herself—not unexpectedly—squarely with the consensus that at least one hike would be appropriate this year, subject of course to the incoming data. She left a September hike on the table, but did not lean strongly in that direction.
When Vice Chairman Fischer was asked whether Fed watchers should be looking for a hike in September and possibly for two hikes this year, he did not directly offer his view, but said that Yellen’s opening remarks were consistent with an answer of “Yes, to both your questions.” We thought this was a rather aggressive interpretation of what she actually said, but he had the benefit of talking to Yellen about her opening remarks before they were given. However, we saw a second message in her discussion of the uncertainty about just how low r-star is—the possibility that r-star in the longer run might even be as low as her estimate of what it is today: zero. That suggested that the appropriate path of the funds rate might be even more shallow than earlier anticipated. That, in our view, leaned against the likelihood of Yellen supporting two rate hikes this year.
George, unlike others, was explicit in her support for a hike in September. She said that it had made sense to her to go in July and that it still made sense. She emphasized the initial conditions, proximity to full employment, and progress with respect to inflation moving to 2%. She also emphasized the importance of forward-looking policy, which reinforced her view that inflation was heading for 2%, separating her from those who needed to be further convinced by the data. Lockhart said that, “if we continue to see the economy perform as it has been, in my opinion, at least one [hike] this year.” This suggests a willingness to move in September, which would be necessary for there to be any reasonable prospect of two hikes this year. Fischer, at least implicitly, was also in that camp.
Mester, along with George, emphasized the case for a gradual rise in rates, which we interpret as very gradual in this context, and therefore not a signal of a preference to hike twice this year. Mester did not discuss her views on a September hike, but her views on the proximity to full employment, progress toward 2% inflation, and forward looking policy suggest she is at least open to September: “Making another gradual step — there is a compelling case for that.” Kaplan said earlier in the week that “I believe we’re approaching … a point at which removing some amount of accommodation will be appropriate.” We read that as leaving September on the table and suggesting that he expects to support at least one hike this year. Bullard appeared to be fairly indifferent with respect to the timing of the next hike, noting that “our framework does call for one more rate increase but exactly when we make that increase I don’t think is critical.” This view makes sense for someone who saw only one hike as likely to be appropriate between now and the end of 2018. But his view that we are basically almost at a neutral rate suggests he is ready to take the last step as soon as there is some “good news.” This leaves him with no more than one move this year, willing to go in September but fine with waiting until December if that is where the consensus is. Powell appeared, uncharacteristically, to be the most dovish of the speakers: “We can afford to be patient. But when we see progress…we should take the opportunity to do so—in the absence of some big exogenous event like Brexit.”
The bottom line is that a September hike remains on the table, and the most important data that could prompt the Committee to support a September hike is a stronger August employment report than we expect. We see the consensus on the Committee as supporting at least one hike this year. But, given the lack of urgency and very shallow projected path for the funds rate, there will probably be only one hike, in December.