Fed: Setting Up December

Published on September 21, 2016

The outcome to today’s Federal Open Market Committee decision was more or less right in line with our expectations: no rate move despite what was probably a closely debated decision — more on the timing rather than whether to hike rates — and a strongly signaled likelihood for a rate hike before year-end, or the December meeting, since November is essentially a non-starter.

*** The statement, Summary of Economic Projections and the always interesting rate dot plots, as well as Chair Janet Yellen’s well reasoned press remarks, were all neatly threaded with the same policy messaging takeaway pointing to a December meeting increase in the target range for federal funds to 50-75 basis points, assuming, of course, the data confirms the forecast. ***

*** It was noteworthy that Chair Yellen led off in her opening press remarks with a somewhat defensive explanation of why they didn’t hike at this meeting, referring to a point we in fact raised when we backed off from a September rate call to December (SGH 9/13/16, “Fed: The December Fallback”), namely that there was a value in seeing the forecast for the outlook confirmed in the data. ***

A “Strengthening” Case

The big takeaway from the statement was obviously the inclusion of the sentence that “the case for an increase in the federal funds rate has strengthened,” which was taken almost word for word from a foreshadowing in Chair Yellen’s Jackson Hole speech last month. They also threw in a “roughly balanced” assessment of near-term risks.

The also statement bolstered the “strengthening” case in the description of the economy, that the labor market has “continued to strengthen,” economic activity has “picked up,” job gains have been “solid” and household spending has been growing “strongly;” indeed, only “soft” business spending is restraining economic growth.

On that note, the median for trend growth was again marked down, slipping below the 2% mark down to 1.8%. Along those same lines, jumping to the rate dot plot, the estimates for the longer run neutral policy rate was also marked down fairly sharply, the median falling below 3% to 2.9%.

The more hawkish Committee members joined their colleagues in essentially throwing in the towel on the neutral rate, with only two left above 3%, and three members marking theirs all the way down to 2.5%. So the FOMC is becoming quite pessimistic on the longer term prospects for the US economy and productivity.

The rate dots across the outer years of the forecasting horizon in 2017 through 2019 also came down quite a bit, as expected, and this year likewise displayed the majority of the Committee penciling in one rate hike in 2016, which again points to December.

Six Committee members effectively dissented from the majority with three on each side of the majority penciling in two hikes or no hikes; two of the no hike dotters are fairly well known, the third perhaps a bit more curious; but easily the most curious, and the most downright odd is the lone “three dotter.”

Since there were only three meetings left going into the September meeting before which the rate projections were submitted, we would suspect Kansas City’s Esther George reckoned the economy needed a remarkable succession of three hikes by the end of the year.

Rosengren’s Hawkish Dissent

But easily the most interesting dissent was by Boston Fed President Eric Rosengren. That George would dissent was hardly a shocker, while the dissent from Cleveland’s Loretta Mester was perhaps mildly surprising, but not entirely in light of her concerns on the need to get going on the pace on policy normalization.

But that Rosengren has gone from something of an uber-dove last year to becoming enough of a hawkish-centrist to dissent is remarkable.

His dissent certainly suggests the concerns over the financial stability issues in staying too low for too long with rates will rise to the forefront of the Fed’s messaging in the run up to the December meeting.

One last point is that we would tend to dismiss press or pundit speculation about the three dissents indicating serious divisions within the FOMC. We doubt the differences run all that deep, and we suspect Chair Yellen in fact does not mind the dissents in that they go a long way towards reinforcing the messaging that a rate hike is nearing.

The Chair, however, does work hard towards achieving a complete Committee consensus when the FOMC does get around to making an actual rate move. And we suspect that today is a pretty good indication that Yellen will get just that with no dissents come December when, if the data cooperates, the FOMC will squeeze off that elusive, second rate hike in its gradual, shallow ascent in the policy rate.

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