Fed’s version of reality TV?

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With little economic news to focus on in the week of 4 April 2016, attention shifted to the Fed’s version of reality TV, with a television broadcast of Federal Reserve celebrities highlighting the drama of setting US monetary policy. The release of the minutes of the March Federal Open Market Committee (FOMC) meeting provided fodder for the commentaries and stoked a flame of rising divergence within the committee.

In the parlance used in the minutes, ‘some pointed towards continued improvement in labour market conditions, a levelling-off of oil prices and a firming trend in inflation as foundation for raising interest rates as projected. ‘Participants’ were supportive of continuing with rate normalisation, even debating an April interest-rate hike, on the assessment that the domestic economy continued to expand moderately despite global economic and financial developments.

US monetary policy meeting: one dissenter

Kansas City Fed President Esther George, the lone dissenter at the March meeting, stood ready to raise rates. She favours “slowly removing accommodation” to reduce risks of fuelling asset bubbles, stating the Fed was “tempting fate” by keeping monetary policy exceptionally loose. Typically considered an interest rate ‘dove,’ Boston Fed President Rosengren stepped forward and opined that the US “has weathered foreign shocks quite well” and believes it “will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial markets futures.

However, contrary to the comments above, ‘many’ participants expressed concern that the global and financial situation still posed “appreciable downside risks to the domestic economic outlook.” A quick look at the new “dots”, or Summary of Economic Projections, revealed a narrowing range of views across the committee for 2016 and 2017 (see exhibit 1 below).

New York Fed President Dudley summarised the consensus view regarding “significant uncertainty” about the economic growth prospects abroad and taking time to assess “how this will affect the US economic outlook,” calling for “cautious and gradual approach” to interest-rate increases. In her comments, Chair Yellen has also fixated on downside risks from global influences citing “room to raise rates if the economy turns out to be stronger than anticipated, while having less room to ease if growth softened.” She also prefers to proceed with caution, highlighting the “proximity of the zero boundary on interest rates” and asymmetry of risks. In a final blow to rate sceptics, she disclosed that the 2% inflation target of the FOMC is “our goal, it’s not a ceiling.

Exhibit 1: FOMC dot plot reveals convergence of opinions for 2016/2017 rates outlook

FOMC dot plot

Source: FOMC, Business Insider

Now on TV: the US monetary policy chat show

In a unique venue with past and present Fed Chairs Yellen, Bernanke, Greenspan and Volcker, leadership spanning 37 years of history of the Fed added heft to the production. In discussing the economic outlook, Yellen appeared to have their support as the group generally agreed that the economy was in good shape, the risk of recession was low and fiscal policy needs to play a larger role in promoting growth.

By the week’s end, markets were left with the typical feeling of watching too much reality TV: there were entertaining moments that actually provided useful information; but mostly there’s just a feeling of overexposure, wishing you had seen less of the actors.

 

Rena Walsh

Head of Money Markets at FFTW

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