Despite what you might think of Jerome Powell’s inclination to follow Janet Yellen’s steps, the question of whether the selected path of the monetary policy tightening will remain the same remains open at least until we see the first statement released under the new governance.
Even under Yellen, the Federal Open Market Committee was becoming more optimistic lately. If we compare the statements of January and December meetings, the FOMC now has a more positive look on inflation, expecting the price growth to reach the 2% goal this year.
Surely, if we skim through the news headlines for the past week or two, we will get an impression that the three interest rate hikes in 2018 are guaranteed (starting from March of course), and the likelihood of four rate hikes is close to certainty. However, if we look deeper into the actual sentiment indicators, macroeconomic data, and verbal signals sent by the FOMC voting members, we can see that not everything is that simple.
The sentiment analysis shows that the probability of the next interest rate hike at March meeting has dipped a little during the US stock market correction but remained in a visible uptrend in February:
Still, at 86% probability of a rate hike on March 21, there is 14% probability of no hike, which serves as an evidence that not all market participants are certain in a higher federal funds rate by the end of this month.
If we check the latest forecast from the Wall Street Journal experts, they are much more optimistic on the interest rate hike than the futures market. In January, the forecasting survey showed that 92.5% of the economists expect a March rate hike; the number rose to 93.7% in February.
January PCE index released on March 1 showed a growth that was in line with the median expectations. Nevertheless, it proved inflation’s reluctance to go up to the central bank’s target of 2%.
US unemployment rate has hit a low of 4.1% back in October 2017. The current stabilization could be a sign that the maximum employment has been already reached.
US GDP growth continues to remain above 2%. Although it might not seem stellar, it is definitely excellent for a developed economy and shines compared to the growth rates in Europe and Japan.
Balance sheet normalization
The Fed is currently conducting a balance sheet normalization process. At $12 billion per month in Treasuries and $8 billion per month in
..we are below target. We really made no progress toward our inflation target.
So I am not really interested in trying to raise the rates all the way to the point we invert the yield curve. Especially, with inflation below target.
President Bullard then reiterated his “low inflation” statements in his Remarks on the 2018 U.S. Macroeconomic Outlook on February 6.
That’s too much. I think that’s going to be data dependent. And a lot of things would have to go right through 2018 to get the full 100 basis points coming in.
Boston Fed President Eric Rosengren in his speech on Reviewing Monetary Policy Frameworks on January 8 mentioned that it could be worthwhile to conduct public discussions of the US monetary policy framework, which could lead to better ways of satisfying the Congressional mandate given to the Fed. He also suggested switching to inflation range from the current inflation target:
…my own view is that we should be focused on an inflation range, with the potential to move within the range as the optimal inflation rate changes.
I consider such a commentary hawkish because, should the Fed switch to, let’s say, 1.5%-2.5% inflation range, the current price growth levels would easily warrant even more aggressive monetary policy tightening. He further adds:
The optimal inflation rate is unlikely to be 2 percent if economic fundamentals cause the central bank’s policy rate to regularly hit the effective lower bound during economic downturns.
With the data I see today, my policy strategy would be to keep policy on hold until midyear or so in order to assess the incoming inflation data. If we get to that point and have more confidence that inflation is moving up sustainably, then further rate increases would be warranted.
San Francisco Fed President John Williams sounded very optimistic in his February 7 speech:
Last year the Committee signaled the likelihood of further gradual rate increases in 2018, and, as I said earlier, my own view is we should stick to that plan.
If the economy evolves as I anticipate, I believe further increases in interest rates will be appropriate this year and next year, at a pace similar to last year’s.
…fiscal policy is becoming more stimulative. In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term.
Markets at large interpreted this as a signal of hawkishness from the FOMC’s head.
Important releases before the meeting
We will see a
To me, it seems that Jerome Powell and other new members of the FOMC are predisposed a bit more hawkishly towards the interest rates compared to Yellen & Co. I expect them to raise the rates during the March meeting and then continue to raise them every three months for a total of four hikes this year. Not that I believe that it is an appropriate pace for the monetary policy tightening.
This blog’s readers have called the December rate hike correctly. I believe that crowdsourced wisdom will be able to forecast the result of the March meeting too.
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The poll will expire on March 21 at 17:00 GMT — one hour before the rate decision is announced.
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