We wanted to wait a bit to think about Federal Reserve Chair Janet Yellen’s speech earlier this morning in Jackson Hole, especially after the rather hawkish coda put to it by Vice Chair Stan Fischer in a brief interview on CNBC.
*** First things first, we still think a rate hike by year-end is highly likely, if not certain, and a September rate hike cannot at all be ruled out. All assumes, of course, the data stay on track to the forecast, which raises the stakes even more on a healthy Non-Farm Payroll next Friday. ***
Chair Yellen could have opted to send a stronger signal about rate intentions in September but clearly chose not to, which was probably the prudent thing to do after the May messaging misfire when a weaker than expected jobs print derailed several weeks worth of hawkish signals about a summer rate move.
But she went as far as she could without prematurely locking the central bank into a rate move next month, carefully phrasing the main policy takeaway that “the case for an increase in the federal funds rate has strengthened in recent months” while giving her some “data wiggle room” just in case the economic activity and job growth stalls or slows significantly in the coming months.
More to the point is what she did not do: she did not back away from policy normalization or send a starkly dovish signal as she did last March in her speech before the Economic Club of New York. And indeed, her remarks today were bookended by disciplined messaging from a chorus of her Federal Open Market Committee colleagues, including both New York Fed President Bill Dudley and Vice Chair Fischer, whose inflation “within hailing distance” was left intact.
Indeed, this is a Chair and a FOMC that is still committed to the policy normalization path of gradual rate increases and which is keen to follow through with a second rate hike to last December’s rate lift-off before year-end.
And while we do think a rate move by December is highly likely, a September move should not be ruled out.
The probabilities pricing popped up to about 38% after Fischer’s helpful translation of Yellen as essentially being consistent with a possible September hike; and if there is a decent NFP on September 2, we would not be surprised to see the pricing cross the 50% mark, which would please the Fed as a messaging well done.
The Path, Not the Timing
A September move, in some sense, could be seen as a carry over from the Committee consensus previously in place for a summer move. A rate hike in June or July was waylaid at the time by the uncertainties in the unexpectedly lackluster May jobs number and the Brexit-led global risks, both of which have since been reversed or have been steadily fading from the forefront of concerns.
One last point would be a September move would at least neatly fit into the sort of “dovish hike” framing the FOMC would like in order to minimize any potential market dislocation or excessive moves at the longer end of the curve. It is the path not the exact timing that counts, Fed officials keep stressing.
So assuming, and we do, that the rate dot projections and longer run neutral estimates are going to be drifting down again in September, a hike could be that much easier to sell. And as we noted in a previous report (SGH 8/5/16, “Fed: The NFP Boost to Rate Hike Odds”), the 2019 rate projections will be unveiled in September, which could show rate hikes continuing into an unprecedented five years since the December 2015 lift-off.
In other words, the rate path will be even shallower than ever, while the terminal point, in theory, could still be at or just under a 3% nominal level, or far higher than the market expects.