The doves are flocking to the hawk side of the perch as a consensus grows in the Federal Reserve that policy-makers should temper robust US growth with a steady increase in interest rates.
Chicago Fed President Charles Evans, a confirmed dove of many years’ standing, affirmed the path of gradual rate increases going into the September meeting of the Federal Open Market Committee. ‘The US economy is firing on all cylinders, with strong growth, low unemployment, and inflation approaching our 2% symmetric target on a sustained basis,’ he said in a speech in Indiana.
The 16 FOMC members raised their expectations for US growth both this year and next in the projection materials provided at the four meetings a year. The September median forecast for this year was 3.1% growth in GDP, compared to 2.8% in June and 2.7% in March. The forecast for next year was raised to 2.5% growth from 2.4%. ‘It is time for the Fed to return to the conventional monetary policy-making of yesteryear,’ Evans added, referring to old-fashioned increases in the overnight fed funds rate.
Eric Rosengren, head of the Boston Fed, started sounding hawkish two years ago after a long history as a dove. He wanted to start moving back towards more normal rates even with unemployment at 5%. Now, with unemployment below 4%, he is championing tighter policy.
Rosengren is part of the growing hawkish consensus on the policy-making panel. The quarter-point increase last week was unanimously approved, and the dot-plot graph showing member expectations of interest rate levels overwhelmingly indicated another rise in December, the fourth this year. Most also expected at least three more increases next year, raising the level to 3%-3.25%. FOMC members have even pencilled in at least one rate rise in 2020.
‘Our economy is strong,’ Fed Chair Jay Powell said in opening the press conference after the FOMC meeting. ‘Growth is running at a healthy clip. Unemployment is low, the number of people working is rising steadily, and wages are up. Inflation is low and stable.’
Powell hinted that one those dots expecting further increases was his, saying, ‘These rates remain low, and my colleagues and I believe that this gradual return to normal is helping to sustain this strong economy for the longer-run benefit of all Americans.’ Fiscal stimulus has much to do with this, Powell ventured. Higher oil prices are stimulating investment in that sector, and both household and business confidence are high.
He has, at least for now, shrugged off the impact of trade disputes. Anecdotally, regional bank presidents are hearing about supply-chain disruptions and loss of markets, but the impact has been too small to show up in the aggregate data.
The FOMC removed the word ‘accommodative’ from its description of monetary policy, freeing policy-makers to move towards the ‘neutral rate’ that neither stimulates nor dampens growth. Fed Governor Lael Brainard, the sole Barack Obama-era appointment left on the board and so a dove by definition, suggested the neutral rate might be drifting higher, meaning the Fed will have to follow it up.
In an early September speech, New York Fed Chief John Williams, considered a dove when he led the San Francisco Fed, said it is a ‘goldilocks’ moment for the central bank, with strong growth, low unemployment and subdued inflation. He has no problem with the current path of gradual rate increases. Even the prospect of an inversion in the yield curve – when short yields exceed long-term yields – ‘would not be something I would find worrisome on its own’, he said.
US President Donald Trump said he was ‘not happy’ about the Fed rate increase, but it’s hard to say how strongly he feels about it. He quickly added that higher rates do benefit people who rely on interest savings for income.
At his press conference, Powell didn’t flinch when asked about the influence of Trump’s opinions on FOMC deliberations. He said the Fed is guided only by economic theory and evidence, not politics: ‘That’s who we are. That’s what we do. And that’s just the way it’s always going to be for us.’
In the meantime, Trump continues to nominate pragmatic economists to the Fed who don’t appear to have any ideological axes to grind. His latest nominee to the board of governors, economist Nellie Liang, who spent three decades at the Fed before retiring and joining the Brookings Institution, was warmly welcomed by Powell. Two other nominees, Kansas banking commissioner Michelle Bowman and economist Marvin Goodfriend, are awaiting Senate confirmation. Liang, if confirmed, would bring the board to its full seven-member complement for the first time in a long time.
Darrell Delamaide is US editor at OMFIF.