Chair Yellen’s much-awaited Jackson Hole speech has been touted in the media as suggesting that there will soon be a second rate hike to follow the FOMC’s December 2015 move. However, many have noted that there was actually little, if anything, new in the speech. She did note that there was continued improvement in the economy, especially on the employment front. Some suggest that a possible move in September would hinge upon the release of the next employment number for August, and some of the FOMC participants in attendance noted that all meetings were still live.
However, both Chair Yellen and other FOMC participants were also painfully on the message to point out that any policy move would depend upon incoming data, that rates would remain low for some time, and that the subsequent path for further policy moves was more important than the exact starting date. None of this is new, and nothing said should be surprising to most Jackson Hole participants. After all, the purpose of the conference is to discuss policy issues and conceptual policy frameworks and not to serve as a substitute for an actual FOMC meeting. It is out of character for FOMC participants to prejudge actual policy positions and/or to suggest that a policy decision has been made, one way or another, in front of a pending FOMC meeting.
Unlike the press, markets revised only slightly their views on the probability of a rate hike in either September or December. The CME estimate, based on Fed Funds futures prices, put the probability of a move in September at only 33%, with a 35% chance in November and only a 57% chance for a move in December.[1] Why might the market’s assessment be so subdued relative to the rhetoric in the press? There are several reasons. First, although FOMC participants suggest that the next employment number will be important, it is also the case that the Committee’s employment objects are close to, if not already, consistent with their statutory mandate. Even there, Governor Powell, in particular, sounded a cautionary note in Jackson Hole. He stated that he believed there was considerable slack remaining in the labor market and that the FOMC could afford to be cautious. Mark him down as a dove, along with Chair Yellen and Governor Brainard.
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Second, GDP growth has been substantially subpar for the last three-quarters, and the only positive contribution of any significance to the Q2 GDP number was consumer spending. The Committee will not have any new information on GDP since June except for anecdotal evidence, sector data, and Beige Book reports. It won’t have even a first reading on Q3 GDP until its November meeting. Given the problems of forecasting GDP, basing a move solely on a forecast is not consistent with the Committee’s risk-management approach to policy.
Third, headline PCE remains far below the FOMC’s target, and that’s a problem. FOMC participants continually express their belief that the depressing effects on prices of the drop in energy prices and appreciation of the dollar are only transitory, but these factors have now been in play for some time and the Committee’s target remains far out of reach. While FOMC participants express confidence that inflation will move towards the Committee’s target, they all state that progress will be slow and not reach the target for a year or more. With GDP lagging and PCE far from the target, there is no urgency to move at this time.
Finally, reaching a consensus among FOMC participants has become increasingly challenging, as recent public discussions by Presidents Bullard and Williams illustrate. The divergence of views as to the appropriate framework for policy and the appropriateness of the current policy stance has clearly increased in the past year or so. President George argued for a rate move the previous meeting. President Bullard has essentially indicated that in the context of his regime-shifting paradigm, present policy is appropriate. President Williams has reached substantially the same conclusion but for somewhat different reasons. He has even suggested that the Committee should consider raising its inflation target to 3%.The resulting disparity of views and approaches to policy among the current FOMC participants is probably wider than it ever has been.
A simple head count among current FOMC voting members suggests the following. Voting for no change would be Chair Yellen, Governors Brainard and Powell, President Bullard, Governor Tarullo, and President Rosengren. It is also highly unlikely, with a majority of the FOMC members favoring no change that Governor Fisher or President Dudley would go on record by dissenting at the September meeting, based upon only additional fragmentary evidence on the economy’s performance. Lastly, given the proximity of the November FOMC meeting to the election and the fact that no new projections would be produced for that meeting, December remains the most likely meeting at which policy would be changed. But, as the Committee emphasizes, regardless of when a meeting falls on the calendar, the decision to raise rates will be dependent on incoming data. The problem is we really don’t know what data or how policy might rely on.
References:
[1] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
