Last week, I discussed the views of 4
Federal Reserve presidents to discern their current interest rate policy. This week’s column finishes that analysis. I would like to offer a personal thanks to
Minneapolis Federal Reserve president Neel Kashkari who responded to a Twitter
question and pointed me to his latest essay on his policy stance. Not only did it make my weekend, but in
showed what a wonderfully powerful tool social media could be.
In an online essay, Dallas Fed President
Kaplan described a fairly healthy economy.
He sees a de-leveraged consumer was the primary driver of GDP
growth. He projects a slight increase in
non-residential fixed investment. Regarding
the Fed’s goals, he noted that the U-6 unemployment rate was near its
pre-recession low, indicating the labor market is near full employment.
And the Dallas Fed’s trimmed mean
PCE is just below the Fed’s 2% target:
Here is his statement on monetary
policy:
Based on these considerations, I have argued that future removals of
accommodation should be done in a gradual and patient manner. In that regard, I
continue to believe that three rate increases for 2017, including the March
increase, is an appropriate baseline case for the near-term path of the federal
funds rate.
Chicago Fed President Evans also believes
the economy is near the Fed’s unemployment and inflation targets. Consumer spending has been strong thanks to
healthy balance sheets and strong job growth.
Business investment has been weak, but the strong dollar has lowered
international demand (and therefore the need for domestic investment) while
weaker oil prices have hampered the oil industry. He also made a very interesting point:
because we’re in a slower growth environment, the pace of rate hikes will be
slower. Put another way, slow growth
means weaker prices pressures which implies a weaker pace of rate increases. Here is his statement on the pace of rate
increases:n
I think the progress made toward the FOMC’s dual mandate goals
justifies our recent rate increases, and my current outlook envisions the fed
funds rate moving up over the next few years along a path roughly consistent
with the median FOMC projection.
Philadelphia Fed President Harker sees
three rate hikes this year. He sees the
following labor market situation: “The unemployment rate has dropped to its
lowest point in a decade, quits are up, and we’re starting to see upward
pressure on wages. I estimate 2.5 to 3 percent wage growth this year, which is
good. It’s what has been missing from this recovery.” He also believes inflation is already near
the Fed’s target. Here is his statement
on monetary policy:
First and foremost, based on the strong economic outlook, I continue to
see three rate hikes for 2017 as appropriate. That, as ever, is assuming that
things unfold in line with my projections.
NY Fed President is also on the record for
2 more rate hikes:
The Fed has penciled in two more rate hikes this year and Fischer said
Friday this remains his forecast.
“So far, I haven’t seen anything to change that,” he said.
He stressed the Fed is “not tied” to a total of three rate hikes this
year and the actual pace of tightening depends on the data.
The lone dissenter from recent rate hike
talks is Neel Kashkari of the Minneapolis Fed. He offered his reasoning in a
recent essay. First of all, he notes
that most Fed governors are treating the 2% inflation target as a ceiling
rather and the median estimate of prices.
He offered the following analogy:
For example, if you are driving down the highway alongside a cliff, you
will err by steering away from the cliff, because even one error in the other direction
will cause you to fly over the cliff. In a monetary policy context, I believe
the FOMC is doing the same thing: Based on our actions rather than our words,
we are treating 2 percent as a ceiling rather than a target. I am not
necessarily opposed to having an inflation ceiling. The European Central Bank
has a 2 percent ceiling instead of a symmetric target. However, I am opposed to
stating we have a target but then behaving as though it were a ceiling.
This is a very important point,
which I believe to be largely correct.
He also noted that other inflation measures – specifically expectations
and labor costs -- are also contained.
And unlike other Fed governors, he believe there is sufficient labor
market slack to warrant maintaining the current rate policy. Here, he cites the employment to population’s
ratio as evidence:
He also references the still high
U-6 rate for support (however, see Dallas President Kaplan’s analysis above). Overall, I would expect Kashkari to continue
being the lone dissenter.
A large majority of Fed governors are in
the hawkish camp now. Unless there is a
fundamental change in the economy, expect at least 2 more rate hikes this year.
