11:14 EST / Nov 24
Fed officials are taking care to leave a smidgen of doubt about the outcome of the mid-December Federal Open Market Committee. But markets will be shocked if the FOMC does not go through with an initial interest rate hike this time after the rhetorical buildup they’ve heard.
Numerous officials have given strong indications that they are ready to support a Dec. 16 rate hike. Others have talked about going into the meeting with an open mind, as one would expect them to do, but they too have indicated they are prepared to raise the funds rate on the seventh anniversary of the zero lower bound.
Fed Chair Janet Yellen, who not long ago told Congress a Dec. 16 move is “a live possibility” which the FOMC is “actively considering,” kept the ball rolling Monday in a letter to consumerist Ralph Nader. She said she and her colleagues “all hope and expect that the economy will continue to expand, that the jobs market will continue to make progress, and that inflation will move toward our 2 percent price stability objective. If that is the case, my colleagues and I have indicated it will be appropriate to begin to normalize interest rates.”
San Francisco Fed President John Williams, Yellen’s top advisor when she ran that Bank, professed open-mindedness in a Saturday session with reporters, saying he is “going to go into that meeting with views, with analysis in my hands, listen to my colleagues and come to a conclusion based on our discussion.”
But Williams, an FOMC voter, said the FOMC’s Oct. 28 decision to stay on hold was “a close call” and strongly suggested that data since then meet the Committee’s liftoff conditions. “The data, I think, have been overall encouraging, especially in the labor market. The data show that the hiccup we saw in a couple of Labor reports has reversed. We’ve seen other signs that the economy is on a good track. And I would say the inflation data have been consistent with inflation — core measures of inflation — having stabilized and maybe even starting to firm up. So I think these are all encouraging signs. And assuming we continue to get good data on the economy, continue to get signs that we’re moving closer to achieving our goals and gaining confidence in getting back to 2% inflation over the next couple of years, then I think…if that continues to happen there is a strong case to be made in December to raise rates.”
At a San Francisco Fed conference last Thursday, Fed Vice Chairman Stanley Fischer did not flatly predict a Dec. 16 rate hike, but dropped plenty of hints that liftoff is probable on that date. at that time is a strong possibility. “In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates,” he said. “While we continue to scrutinize incoming data, and no final decisions have been made, we at the Fed have done everything we can to avoid surprising the markets and governments when we move…”
Indeed, Fischer noted, “several emerging market (and other) central bankers have, for some time, been telling the Fed to ‘just do it.’” He said “we don’t take orders form other places, but we have to listen.” And he said the fact that other countries are saying “just do it” is “an important indicator they’ve made their preparations.”
Fischer cracked that when he first joined the Fed Board of Governors in May 2014, he had trouble “getting excited” about talking about interest rates at each FOMC meeting, “but now it’s getting exciting and interesting.”
Even dovish Fed Governor Daniel Tarullo may be having a change of heart. Ahead of the Oct. 28 meeting, he “wouldn’t expect it would be appropriate to raise rates” this year. He did not say he now favors a rate hike before the end of the year Monday, but neither did he vocally oppose it as he did last month.
Tarullo simply declined to say whether he would support a rate hike in December when he appeared on Bloomberg TV. “I think it is a mixed picture,” he said of the economic outlook. “We have seen continued improvement in the labor market, but the environment for inflation is still one where there is a lot of uncertainty.”
Tarullo conceded that economic conditions have improved and downside risks lessened. He said there now is “a fair amount of balance and the data goes both ways.” By contrast, in September there was “some sense” the economy could slow further, but “what we have seen since then … is not the realization of some of the fears that exist in September.” The economy “has shown, by the latest jobs report, to still be chugging along with modestly above trend growth,” he said.
“It is hard to overlook the fact that both market-based measures of inflation compensation and survey-based measures of inflation expectations are sort of near historic lows,” Tarullo said. “We are not meeting the Fed’s own stated inflation target.”
But, of course, inflation does not have to be at target for the FOMC to begin normalizing interest rates. Policymakers need only be “reasonably confident” inflation will reach 2% “over the medium term,” i.e. in two years or more.
Begging off saying when the FOMC should lift off, Tarullo said, “there has been an awful lot of talk about specific months over the last year … . There is probably too much attention being paid to particular months and meetings,” he said, “and not enough attention paid to what is going to be the trajectory of rates.” He did not sound much like a man who would dissent against a rate hike if that’s what Yellen wants.