Fed: Brainard

Published on September 8, 2016

We suspect that Federal Reserve Governor Lael Brainard never imagined in a month of Sundays the sort of market reaction that would greet the updated list of Fed speakers this afternoon listing her participation in a “conversation” on the economic outlook and monetary policy this Monday in Chicago.

The market seized on a possibility the dovish-leaning Governor would do a volte-face and deliver a hawkish signal on a rate hike at the September 20-21 Federal Open Market Committee meeting.

*** We have no particular sense whether or not Governor Brainard is likely to undergo some sort of hawkish Damascene conversion on the road to the September FOMC meeting in her remarks, but we rather doubt it. We likewise do not think the “sudden” announcement is a pre-planned effort to stoke market pricing on a decision already made for a September rate hike. ***

*** We would caution, however, that if she displays any nuance in her views on the outlook, or any acknowledgment that in some ways economic or financial conditions have indeed improved in recent months, whether intended or not, the market will take it very hawkishly and aggressively price in September rate probabilities. ***

*** Regardless of Governor Brainard’s remarks, we still believe there is a FOMC majority favoring a rate hike this year (SGH 8/17/16, “Fed: Jackson Hole Prologue”). We would not rule out a September move since, on balance, the data to justify a second rate hike in the policy normalization path is essentially in place and unlikely to offer significantly more clarity on the outlook by December. ***

No Pre-Planned Plot

With such a wild market reaction to the Brainard announcement, a few observations seem in order:

First, we understand that Governor Brainard accepted the invite to speak at the Chicago Council on Global Affairs event last week and it has been on their website ever since (obviously who scrolls through their website for market-moving Fed speakers?) and her acceptance of the Council’s invite apparently just missed the deadline for the Fed’s weekly update of Fed speak.

In other words, this is not an instance of pre-planning by the Board to find a forum for a Fed speaker to rush a last minute policy message out there before the pre-meeting blackout. And we likewise seriously doubt another speculation in the market that Fed Chair Janet Yellen asked Brainard to deliver a hawkish message to clear the way for an intended rate hike at their September meeting.

For one, that is not how the Board operates and it would be too clever by half for such a plot being hatched. This is a central bank, not a conspiracy straight out of Zero Hedge. More to the point, that would presume a decision to hike rates at the September meeting has already been made and that the only thing holding back the intended move was the market’s complacency in pricing in the impending rate move.

But while we do think there is a Committee majority consensus leaning to a rate hike before year-end, we still doubt the decision to hike this month is already locked in. Chair Yellen, in her methodical ways in building a consensus, often calls most if not all the District Committee members to get a feel for their views and concerns, but usually starting next week after the District presidents have gone over the economic outlook and financial conditions with their staff.

Misinterpreting Nuance

That said, it is not entirely pre-ordained what Governor Brainard will say about the economic outlook or if she will say anything at all about her views on the timing to a rate hike or indeed if she still assuming a single rate hike this year.

In some ways, since her last speech on June 3, most of the concerns she had that had made her so cautiously dovish and against a summer rate move have since diminished: both the Brexit and China risks have faded from the forefront, the dollar is not appreciating, and her desire to see more evidence that inflation is rising, and higher inflation expectations in particular, has to some degree been met, since some measures of inflation expectations have modestly risen.

But we just have our doubts she will rise to a question put to her by Moskow and reel off an answer on inflation sounding like, say, her Board colleague Vice Chair Stan Fischer in seeing inflation within “hailing distance.”

But Governor Brainard could offer up a bit more nuance in her previous, unmistakably dovish views, perhaps acknowledging the labor market continues to tighten (well maybe not that since she doesn’t seem to be as fond of the Phillips Curve as many of her colleagues) or that the transmission of low inflation through the dollar seems to be easing.

Whatever update she offers on the outlook, in other words, set against the market’s pigeonholing her as uber-dovish means that any subtle changes or granularity in her views could be taken as a hawkish message, even if none is intended.

That is perhaps why it might be best to take whatever she says Monday afternoon against the backdrop of the remarks by Atlanta Fed President Dennis Lockhart earlier that morning, or that of Boston Fed President Eric Rosengren on Friday to get a broader picture of the mix of views going into the pivotal September meeting.

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