Fed's Big Three Expected to Reinforce December as Liftoff Option

Will the Fed Move Forward With a December Rate Hike?
  • Yellen, Fischer and Dudley all set to speak publicly Wednesday
  • Officials may seek to end period of confusion in markets

Federal Reserve Chair Janet Yellen and her top two lieutenants, all speaking publicly Wednesday, have a chance to drive home a united message about their readiness to raise interest rates in December if the labor market continues to show modest improvement.

Yellen testifies before the House Financial Services Committee at 10 a.m. on Capitol Hill. The official topic is financial regulation, but lawmakers are free to ask her anything, including about monetary policy or the economy. New York Fed President William C. Dudley will hold a press briefing at 2:30 p.m. in New York, and Vice Chairman Stanley Fischer will speak to the National Economists Club in Washington at about 7:30 p.m.

“This is a unique opportunity to reinforce the message” from last week’s Federal Open Market Committee, said former Fed Governor Laurence Meyer, who is now senior managing director of Macroeconomic Advisers LLC in Washington.

The trio of appearances follows an unexpectedly upbeat message from the FOMC on Oct. 28. Officials emphasized the positive in a mixed bag of domestic economic data, dropped a prior reference to troubling global conditions and drew specific attention to the possibility of a rate hike at the panel’s next session. Expectations for a December move rose sharply, reflected in Treasury notes and federal funds futures.

The FOMC statement referred to the group’s “next meeting” on Dec. 15-16 in its discussion of liftoff timing.

By hitting the same note on Wednesday, Yellen, Fischer and Dudley could help squelch an unusual period of public disharmony at the Fed that has confused investors and led to criticism of its communications.

The FOMC had appeared on track for a September policy move before market volatility caused by China’s surprise currency devaluation in mid-August raised new worries over the health the world’s second-biggest economy. From there, committee members appeared to move in different directions.

Dudley on Aug. 26 called the case for a September hike “less compelling.” Fischer tried to keep September on the table three days later in a speech at the Kansas City Fed’s annual Jackson Hole symposium, hardly mentioning China and declaring his faith that low inflation, a sticking point for those resisting a rate increase, was being held down by temporary factors.

By the time the panel gathered Sept. 16-17, market turmoil had subsided, yet officials left rates near zero over worries that China’s slowing economy would stunt growth and inflation in the U.S.

Yellen followed the meeting with a cautious-sounding press conference, then tacked the other way on Sept. 24, revealing that she was among policy makers who still saw a rate rise as likely to happen before the end of the year.

In a surprising turn that showed the diversity of views on lifting timing, Governors Lael Brainard and Daniel Tarullo made clear on successive days in mid-October they preferred to wait until 2016 for a rate increase.

That sent expectations for a December increase plunging to as low as 27 percent on Oct. 14, from 64 percent on Sept. 16, according to fed funds futures. The calculation is based on the assumption that the effective rate will rise to 0.375 percent after liftoff.

Confused Message

Mark Gertler, an economics professor at New York University who has published research with former Fed Chairman Ben S. Bernanke, said that while the FOMC could have been clearer in its communication, most of the confusion is the result of economic data that’s made the Fed’s decision-making difficult.

Recent figures on jobs, manufacturing, retail spending and exports have disappointed, while new jobless claims and most housing data have been decidedly positive.

“They’re getting different interpretations because the data isn’t lining up perfectly,” Gertler said.

Gertler also argued that too much weight has been given to Brainard’s and Tarullo’s remarks.

“Any experienced Fed watcher will know there’s a center of the committee and there’s going to be people on either side. The center is Yellen, Dudley and Fischer,” he said. “Certainly there’s an opportunity to clarify what’s going on” this Wednesday.

Whether the confusion is the fault of the committee, economic data or investors, Fed officials felt compelled in October to go back on their own decision to avoid any specific signal ahead of a possible rate hike.

Minutes of the April FOMC meeting show “participants discussed the merits of providing an explicit indication, in post-meeting statements released prior to the commencement of policy firming” before rejecting the idea.

December Signal

At its meeting last week, the committee decided a more explicit indication was needed, after all. And the message got through. Expectations for a December rise based on fed funds pricing have snapped back to 50 percent.

That may be exactly where the Fed’s leadership wants to keep it when they speak Wednesday, said Kermit Schoenholtz, director of the Center for Global Economy and Business at the NYU Stern School of Business, because they still want to see incoming data before making a final decision.

“December is still on the table, but it’s premature for them to close the door one way or the other,” he said.

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