Last week was busy for FOMC communication in the form of policymakers’ speeches, interviews, and panel discussions. There were 6 speeches.
The key themes were uncertainty and cautious optimism. The first was more explicit and universal than the second. The uncertainty reflects the tension between a slowing in GDP growth in Q4, tighter financial conditions, and heightened global risks, on the one hand, and solid employment growth and favorable underlying fundamentals, on the other hand. As a result, it is premature to materially alter the medium-term forecast, which still has growth strong enough to lower the unemployment rate further and to remain optimistic about growth, the unemployment rate, and inflation. But the uncertainty calls for a wait and see posture. On balance, we interpret the speeches last week as consistent with the FOMC thinking that a rate hike in March is unlikely (but not completely off the table) and a June hike is still more likely to happen than not, though it is data dependent in the end. The forecast for core inflation is little changed, but likely marked down slightly in 2016, given the new round of oil and dollar shocks.
President Williams (panel on 2/5): He felt optimistic about the economy, but worried about developments in the rest of the world. Nevertheless, he saw a need for a bit more accommodation than he did in September and now expects a “smidgen” slower pace of tightening than before.
President Mester (talk on 2/4): Recent financial and global economic developments pose risks, but “it is premature to materially change [her] modal outlook” in light of recent financial and global developments. She viewed these developments as posing risks rather than warranting a change in her forecast.
Governor Brainard (interview on 2/3): Concerned that stressed in emerging markets including China could spill over to US. Recent developments, including tighter financial conditions, “translates into…slower progress on hitting the inflation target.” As a result, “recent developments reinforce the case for watchful waiting.”
President Dudley (interview on 2/3): “One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting.” “So if those financial conditions were to remain in place by the time we get to the March meeting, we would have to take that into consideration in terms of that monetary policy decision.” “Things have happened in financial markets and in the flow of the economic data that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward, but it’s a little soon to draw any firm conclusions from what we’ve seen.”
President George (talk on 2/2): “The fundamentals of the U.S. economy currently appear strong enough to sustain positive growth going forward.” “While a single quarter of slower growth is important to watch, I take reassurance that the economy remains on track due to strong job gains.” “Inflation has remained muted as a result of lower oil prices and the strong U.S. dollar…core measures of inflation have recently risen on a year-over-year basis.”
Vice Chair Fischer (panel discussion on 2/1): He expressed increased concern about global outlook, including structural adjustment in China and the effect of the decline in oil prices on oil-exporting countries. He discussed increased volatility in financial markets and noted “it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States.”
George is an infrequent speaker; this was only her second speech in the last six months, and her speech was characteristically slightly hawkish. Fischer’s speech at the start of the week was less hawkish than several of his recent communications. His informal comments with Tom Keene later in the week reinforced this move to being slightly less hawkish. Mester, on the the hand, while showing confidence in the medium-term outlook, was less hawkish than in earlier talks. Overall, these speeches reflect the themes we identified above: uncertainty and a wait-and-see posture with respect to monetary policy, but nevertheless cautious optimism about the medium-term outlook, which appears to have changed little.