Fedspeak was decidedly hawkish today, with both Atlanta Federal Reserve President Dennis Lockhart and San Fransisco Federal Reserve President John Williams insisting that market participants are wrong to assume the Fed will pass on the June meeting. Via Greg Robb at MarketWatch:
Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, in a joint appearance at a lunch sponsored by the news site Politico, said that the decision on whether to raise rates at the June 14-15 meeting depends on the data.
June “certainly could be a meeting at which action could be taken,” Lockhart said.
“I think it is a little early at second-quarter data to draw a conclusion, so I am at this stage inconclusive about how I am going to be thinking about June, but I wouldn’t take it off the table,” Lockhart said.He said he assumes there will be two to three rate hikes this year...
...Williams said he agreed with Lockhart and said he thought the economy was “doing great.”
“I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting,” Williams said.
He added that there will a lot more data reported before the meeting.
In an interview with the Wall Street Journal prior to the Politico lunch, Williams said raising rates two or this times this year “makes sense.”
Separately, Dallas Federal Reserve President Robert Kaplan argued for a rate hike in June or July. Via Ann Saphir at Reuters:
"Whether that’s June or July, I can’t say right now," Kaplan told reporters after a speech. He said would prefer to pause after that first 2016 rate hike to assess conditions, and while he would "hope" to continue to normalize rates thereafter, the pace of rate hikes will depend on incoming economic data.
None of these three are voters. Still, there is a message here - many FOMC participants want to go into the June meeting with a reasonable chance that they will hike rates. They don't want the outcome of this meeting to be a foregone conclusion. Two other thoughts:
1.) The more hawkish Fedspeak could be foreshadowing that the minutes of the April FOMC meeting will have a hawkish tilt.
2.) Kaplan puts July on the table. I had been thinking that July was off the table due to the lack of a press conference. That said, I should be open to the possibility that they use the June press conference to clear the way for July.
Market participants raised the probability of a June rate hike to 15% today. Still probably less than the probability assigned by the median FOMC participant. Meanwhile, the yield curve flattened further - signaling that the Fed needs to move very cautiously. At the moment, the Fed doesn't have much room before they invert the yield curve. In my opinion, the bond market continues to signal that Fed's expectation of normalizing short rates in the 3.0 - 3.5 percent range are wildly - and dangerously - optimistic.
En junio hay un 12% de probabilidad de que suba un cuarto de punto. En julio las probabilidades son del 26%. Es verdad que estas probabilidades eran mucho mayores hace una semana (4% y 17%). Hay que irse a la reunión de septiembre para encontrar probabilidad de subida de tipos elevadas. Concretamente en la última semana, la probabilidad de que los tipos suban en la reunión de septiembre ha pasado del 30.6% al 46.6%.
"Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds" rate in June.
While an increasing range of US economic data including consumer spending numbers this week appear supportive of a second quarter-point rate increaseas soon as June 15, the Fed’s meeting comes just a week before the vote that could send shockwaves across the global financial system in the event of a “leave” result.
The idea that US monetary policy could be influenced by a vote in a foreign country is highly unusual. Yet a decision by the UK to exit the EU would have hard to predict and potentially destabilising consequences across Europe and global markets.
Pushing the button on a rate increase ahead of the referendum risks not only inflaming volatile market conditions, but also sending a message to markets that the Fed sees an urgent need to lift rates despite the risks abroad — at a time when the central bank does not appear obviously behind the curve on interest rates as core inflation hovers below target.
Jerome Powell, a member of the Fed’s Board of Governors, last week said the vote on a possible Brexit on June 23 was a reason for “caution” by the Fed’s decision-making body, adding that a rate move could come fairly soon if data stay on track.
Dennis Lockhart, the president of the Atlanta Fed, told the FT in May that the Brexit issue was a “real consideration” for the Fed, adding: “If it were a question of being cautious in June, July should be a real possibility, but with communication that prepares the markets.”
Some officials including St Louis Fed president James Bullard have argued the Fed should not allow the UK vote to affect its monetary decision-making, while others have suggested the US central bank could always reverse a rise if the fallout made it necessary down the line. A monetary U-turn is not a move the Fed would relish, however, given the volatile impression it would project.
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