You know Waldo, right? Just need you to bring back your inner child! Here Yellen is Waldo. Where is she hiding in the dot plot? Our focus here is on 2017.
Is Yellen at two hikes or at three? Not a difficult question, in our view. She’s at three hikes.
There are two guiding principles for understanding where Yellen’s dot will be, in general. First, Yellen’s role as Chair is both to shape and to reflect the consensus. If the median is very clear, we expect she will be at the median. If there are two nearly equal options, we expect her to be at the more dovish of the two. Here, the median is three; there are four at two and six at three. Therefore, our bias is toward three. Second, the process of elimination always helps.
Before we weigh in on the dots, we want to acknowledge those participants who made our job easier by essentially self-identifying their 2017 dots.
Let’s start with the most dovish. We see the most dovish participants as Bullard, Tarullo, Brainard, and Kashkari.
But we have to acknowledge that Bullard is in a class by himself. Of course, he self-identifies. The number of moves he believes is appropriate is the number that brings the funds rate to his estimate of the equilibrium level, and he wants that to happen sooner rather than later. Interestingly, before Trump’s election, he expected one move to be appropriate between December 2016 and the end of 2019. Now he has increased the number of hikes that he expects over that period to two, and we already got one. This revision reflects his view that Trump’s pro-growth policies will raise the real equilibrium rate.
So of the two at one move, we have to put Bullard at the top. For this exercise, it is unimportant who the other one-hike dot belongs to—Brainard or Kashkari—but if we had to pick, we’d guess that Brainard is the other one-hike dot. That leaves Kashkari as a two-hike dot. We also see Tarullo as one of the two-hike dots.
That leaves us with two dots left of the four at two hikes. Both Evans and Lockhart have self-identified as being at two hikes. Therefore, Yellen likely put down three hikes. Not surprising, because she has a very positive view of the outlook. Yes, maybe a little running room, but not much, and with growth above trend and the unemployment rate below the NAIRU, which in any case she prefers. And she is a Phillips-curve kind of person, so she is reasonably confident that core inflation will get to 2% by 2018. It’s time, she believes, to begin to remove more accommodation. We expect this to be consistent with her remarks tomorrow.
Next, we move to the most hawkish two dots, which are at 4½ hikes and six hikes. We suspect Lacker is at six hikes because he tends to think about appropriate monetary policy in terms of the Taylor rule. That would be consistent with reaching the neutral rate sooner rather than later. But wow, six hikes—pretty
aggressive, no? It makes sense if you consider that in December 2015 he was projecting seven hikes in 2016, but only got one. So much of the tightening he sees as appropriate in 2017 is likely just catch-up for last year. We see George as the next most hawkish member, so we put her at 4½ hikes.
Now we turn to the four-hike dots. We see Mester, Fischer, and Rosengren at four hikes. Mester essentially self-identified as four hikes. While we would have thought that Harker might be at four hikes, as he appeared to be among the more hawkish members, he self-identified as three. We see Fischer as the most hawkish among the centrists, certainly more hawkish than Yellen, so we have him at four. Rosengren has become more hawkish recently, and he fits nicely at four.
Now we have to fill in the rest of the threes. Both Williams and Harker self-identified as three hikes. Kaplan appears to be a centrist and suggested that he put down three hikes. We might have put Powell at two hikes, as he has been quite dovish of late. But, as a centrist, he still fits comfortably at three hikes. One leftover: Dudley. He must also be at three hikes.
In Their Own Words
As we commented in our latest Weekly Update (link), many FOMC participants revealed their views of appropriate policy over the past week. We compiled their views in the table below. For those participants whose views are not known yet—particularly governors—we give our best guess and present a supporting quote. Note that the employment report was released the morning of January 6, after many of these remarks were made (link to our interpretation).
While many regional Fed presidents revealed their views on 2017 hikes, Fed Board governors have remained characteristically tight-lipped. Based on their previous remarks and leanings, we suspect that Brainard wrote down one hike for 2017; Tarullo put down two; Yellen and Powell were at the median of three, and Fischer was at four. Now that we have systematically inferred the likely owners of each dot, let’s revisit the table again:
As Powell warns, it would be wise not to place too much emphasis on the dots, as we believe what is more important at this juncture is the balance of risks around our macro (and policy) forecasts. Our base case remains two hikes in 2017, although it is a close call between two and three hikes, depending on how the outlook changes, in particular for fiscal policy.