Monday, March 30, 2015

Fed: Talking Heads
The FOMC certainly has lots of talkative personalities. They love to share their opinions with us on a regular basis, especially just before and just after their meetings, and in between. The only time we ever seem to get a break from them is during the “quiet period” of five business days in which they stop talking publicly about monetary policy as they prepare for their next policy meeting. It didn’t take them long to start yapping away after the latest meeting ended on March 18. The FOMC clearly has a split personality on the issue of when to start raising interest rates, a.k.a. “liftoff”:

(1) Lockhart. In a NYT interview on Wednesday, FRB-Atlanta President Dennis Lockhart said the following about the timing of liftoff: “So for me to say June-July-September [with] full confidence is probably overstating it, but I think it’s quite likely.” On Thursday, he hedged a bit, saying that he is paying more attention to the rising dollar to see if it’s weighing on the economy.

(2) Bullard. In a speech on Thursday in Frankfurt, FRB-SL President James Bullard said that current low levels of US inflation are likely temporary and the risks of keeping the federal funds rate zero for too long “may be substantial.” He believes that the FOMC should start tightening: “Now may be a good time to begin normalizing US monetary policy so that it is set appropriately for an improving economy over the next two years.”

(3) Evans. FRB-Chicago President Charles Evans warned that there were considerable risks in raising rates too early in an environment where core inflation is persistently below 2%. “Some say we are behind the curve, that interest rates are unusually low but we’re not at a point of business as usual,” he said during a FT interview.

(4) Yellen. In a speech on Friday, Fed Chair Janet Yellen said, “Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year.” She concluded her speech by saying, “Nothing about the course of the Committee's actions is predetermined except the Committee's commitment to promote our dual mandate of maximum employment and price stability.”

(5) YRI. Debbie and I are now assigning the following subjective probabilities to the three possible scenarios for the Fed’s liftoff this year: Normalization (20%), One-and-Done (60), and None-and-Done (20). I’m still expecting the one and only rate hike this year in June, while Debbie thinks September is more likely. The FOMC isn’t the only organization with split personalities.
(Based on an excerpt from YRI Morning Briefing)

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