In recent days, a few Fed officials suggested that they are kind-of-sort-of ready to move forward with normalizing monetary policy with another rate hike.
They are regional FRB presidents William Dudley (FRB-NY), Dennis Lockhart (FRB-Atlanta), and John Williams (FRB-SF) and FRB Governor Stanley Fischer.
Just to clear up some confusion he created last Monday about his position on this matter, Williams issued an unusual press release on Thursday with the headline-grabbing title: “Fed’s Williams Advocates Rate Hike.” More specifically, the release said that he said that a return to rate hikes “makes sense … preferably sooner rather than later.”
Up until now, Fed officials have stressed that the process of normalization will be gradual.
Nevertheless, during the December 15-16, 2015 FOMC meeting, they collectively and boldly projected that the federal funds rate would rise to 3.3% in 2018. At that yearend meeting, they raised the rate by 25bps to a range of 0.25%-0.50% (Fig. 1). Their forecast for 2018 was very close to their consensus view that the federal funds rate should be 3.5% in the “longer run” (Fig. 2). In their latest, 6/15 outlook, the 2018 consensus was lowered to 2.4%, while the longer-run number was down to 3.0%.
Melissa and I suspect that Fed officials are starting to set the stage for an abnormally limited and short process of normalization. In other words, they are likely to continue lowering both their 2018 and longer-run projections for the federal funds rate.
Consider the following:
- (1) Bullard. In a 6/17 statement, FRB-SL President James Bullard said that he sees just one more rate hike this year and none over the next two years; he opted out of providing any longer-term forecast. He wants to scrap the dot plot, arguing that it has come to be viewed nearly as a commitment to act, contrary to officials’ intention to adjust policy on the basis of economic data.
- (2) Williams. In his 8/15 Economic Letter, Williams wrote that monetary policies are challenged by a new normal in which economic growth, inflation, and interest rates are persistently abnormally low. He stated: “There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low.” So what’s the Fed to do? Williams still believes that the Fed’s job is to stabilize prices and employment. But in his opinion, it’s also the job of fiscal policymakers to focus on “longer-run goals such as economic efficiency and equity.” Williams even suggested that fiscal policy should be a “first responder” to recessions! Separately, Williams suggested that the Fed might consider changing the way it operates altogether, either by pursuing a higher inflation target or changing the target to nominal GDP growth rather than inflation. As we previously noted, a higher inflation target would argue for keeping the federal funds rate lower for longer.
- (3) Dudley. Last Tuesday, Dudley was interviewed on the Fox Business Network. He indicated that the Fed may not have much further to go in normalizing monetary policy. In the U.S., “there are reasons to think that monetary policy isn’t particularly stimulative right now, and you can sort of judge that by the fact that we only grew at a 1 percent annual rate in the first half of the year,” he said. “So we probably don’t have a lot of monetary policy tightenings to actually do over time.” We believe that’s strong confirmation of our view that a “Great Reassessment” of monetary policy is underway at the Fed.
- (4) FOMC. The topic of the Jackson Hole meeting later this week is “Designing Resilient Monetary Policy Frameworks for the Future.” The FOMC minutes of July 26-27 policy meeting started with a vague summary of special briefings from the Fed’s staff on the related topic of how monetary policy should be conducted in a low-rate world. The unusual first section of the minutes was titled “Long-Run Monetary Policy Implementation Framework.” We read it twice and couldn’t find any specifics. That might be because: “In the discussion that followed the staff presentations, policymakers agreed that decisions regarding an appropriate long-run implementation framework would not be necessary for some time.” At the conclusion of the discussion, Fed Chair Janet Yellen “asked the staff to continue its work and noted that policymakers would review further analysis at a future meeting.”
- (5) Hilsenrath. The WSJ’s ace Fed watcher Jon Hilsenrath posted an important article on Sunday titled “Fed Officials Brace for (Familiar) New Normal.” He observed: “For much of the post-financial-crisis era, U.S. Federal Reserve officials have held to a belief that they could get back to their old way of doing things. Growth would resume at a modest pace, annual inflation would climb to 2% and interest rates would gradually rise from near zero to a normal level near 4% or higher. As they prepare to gather at their annual retreat in Jackson Hole, Wyo., officials are grimly coming to a view that it isn’t going to happen that way. “Growth in economic output appears stuck at a slow pace, with inflation vulnerable to undershooting the central bank’s target. The Fed, in turn, is starting to see that rates aren’t going to return to normal and the way it conducts monetary policy and deals with recessions is going to have to change.”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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