What I FOMC

Monday 10/12/15

After the last few weeks of economic data, the possibility of a fed rate hike now seems like a distant memory. Just a few weeks ago I wrote about the upcoming fed meeting and mentioned that many market participants were expecting a rate hike. You can use the 30-day fed funds futures to calculate the probability that market participants give to a rate hike by a given fed meeting. When I wrote about the upcoming September fed meeting, the probability of a rate hike was 23% in September and 58% in December. However, the market has had a change of heart since that meeting, and the probability of a hike in October is now only 8% and down to 37% for December. Many people like to point out the accuracy of the fed fund futures at predicting rate hikes, but they have been shown to be less useful around major turning points in fed policy. This week I am going to do something different and analyze the most recent comments comments from each of the voting members of the FOMC (Federal Open Market Committee). Yes, the title of this post is a really bad pun—my sincerest apologies.


Janet Yellen

• Thinks low inflation is transitory


• Needs to be reasonably confident that we will see continued economic growth over the next several years and gains in resource utilization.


• Prospects for the economy seem solid


• Cited strong payrolls, however a very weak employment report has been released since these comments.


• Thinks low inflation is mostly due to the drop in energy prices


• Thinks a hike will be appropriate this year

William Dudley

• Hike depends on whether the labor market continues to improve


• These comments came after the weak employment report


• Thinks the economy is growing above trend


• Thinks a rate hike is appropriate by December, but not a commitment

Lael Brainerd

• Hasn't spoken about the state of the economy recently, but will be speaking later this week.


• Was openly opposed to a rate hike before the September meeting


• Because economic conditions have deteriorated since the previous meeting, my assumption is that she is not in favor of a rate hike this year

Charles Evans

• Vague in his comments, favors a somewhat later liftoff from most of his collegues


• Thinks inflation headwinds will continue into mid-2016


• Wants to see signs that inflation will rise before hiking


• Based on my interpretation: No hike this year

Stanley Fischer

• Most recent comments of any fed speaker


• Economy is growing, but with considerable uncertainty due to global factors (translated: he's worried about the impact of a strong dollar on emerging markets and how that will affect the financial system)


• He's worried about China and cited that as a reason for the delayed hike


• ”shifting expectations about the Fed's policy plans could itself be a source of volatility” This means that his views will change based on fed funds futures


• My reading of his comments were that he will not be in favor of a hike this year without a substantial increase in market conditions so I'm categorizing him as a no-hike this year

Jeffrey Lacker

• Thinks a rate hike has been delayed too long


• Thinks there will be adverse outcomes if rate hike is delayed


• Wants to hike immediately

Dennis Lockhart

• He is happy with the direction of the economy


• He is a little worried about the employment report, but doesn't think that's enough to delay rate hike


• Rate hike still likely this year despite headwinds

Jerome Powell

• Hasn't spoken in a while


• In a June interview he said a rate hike in September was 50-50


• He was forecasting much stronger economic growth in the second half, he was wrong


• He wants to hike before inflation goals are reached


• He could go either way on a rate hike this year, my guess is that he won't dissent from the majority

Daniel Tarullo

• Hasn't spoken on policy lately, he's more of a regulations guy


• Thinks U.S. growth is strong, European growth is improving, but is concerned about emerging markets and thinks they need a boost to aggregate demand to increase borrowing


• He will likely vote with Yellen

John Williams

• Doesn't think the market should raise rates if nobody in the market is predicting it, this means he wants the fed funds futures to be higher before hiking


• He has been a consistent dove


• No hike this year

Conclusion

So that leaves us with four who probably want to raise, four who don't want to raise and two wild cards. I highly doubt that a vote would ever be that close in practice though. Usually the more powerful fed members will be able to form a consensus. Yellen and Fischer are clearly the two most influential members of the committee and most of the current members will not dissent, nor do I think Fischer and Yellen would dissent from one another. My suspicion is that Fischer will push to delay the rate hike until market conditions improve again. I think that as soon as we get a really stellar employment report or we see a significant uptick in wages a rate hike will follow shortly thereafter.