Hard To Say That November Is Really “Live,” by Tim Duy: If there is one thing that I am fairly sure that monetary policymakers hate, it is the idea that the outcomes of their meetings are preordained. November appears to be just such a meeting. To be sure, Fed hawks want to believe the meeting is “live.” The sizable group that dissented – or would have dissented if they were voting members – likely sees the case for a rate hike in November as even more pressing than in September. Remember, it is all about preemptive policy action from that contingent. If you thought delay was bad in September, it must be worse in November. But the doves – including a powerful group of permanent voting members – will likely have none of it. From their point of view, the case for a rate hike is no more pressing in November than September. Indeed, according to the the dot-plot, at least three would be happy taking a pass in December as well. And, although they would be loathe to admit it, within the context of a risk management framework the timing of the election argues against a hike as well. As I see it, the best the hawks can hope for is a strong statement about December. The data would have to very quickly turn very strong to give the hawks an upper hand in November.
I did get a chuckle out of this last week:
Dennis Lockhart tells reporters “we need to continue to reinforce the idea that November is a live meeting”
— Matthew B (@boes_) September 29, 2016
The only way to reinforce the idea that November is a “live” meeting is to continue to hold out the hope of a rate hike. But unless the doves budge between now and November, a rate hike is not happening. And the doves aren't likely to budge anymore than the hawks. It's kind of a stalemate at the moment, and everyone knows it. So reinforcing the the idea that a hike is going to happen when it isn't is not really an effective communication strategy. It is not exactly good policy guidance.
Cleveland Federal Reserve President Loretta Master would also like you to believe November is “live.” From Monday, via Bloomberg:
Federal Reserve Bank of Cleveland President Loretta Mester said the economy is ripe for an interest-rate increase and repeated that the Fed’s November meeting should be viewed as “live” for a policy decision, despite its proximity to the U.S. presidential election.
“I would expect that the case would remain compelling” for a rate hike when the Federal Open Market Committee gathers in Washington Nov. 1-2, the week before Americans head to the polls, she told Kathleen Hays in an interview on Bloomberg Television Monday. Mester added that politics wouldn’t affect the decision.
Of course she wants November to be “live.” She wanted to hike rates at the last meeting. And I suspect she believes that unless the hawks can push up rate hike expectations to something closer to 50% (from the current 13% or so), they have no chance of pushing through a rate hike. Not that I think they have much of a chance even then. Seems that his amounts to trying to manipulate market expectations to obtain an advantage at the FOMC meeting. I sense this is what hawks have attempted more than once this year. In my opinion, this too is not a good communications strategy.
Like the outcome of the November meeting, Mester's dissent is also preordained.
Mester also repeats the “politics are irrelevant” story. And, broadly, I agree. I don't believe, for example, the Federal Reserve Chair Janet Yellen is holding rates low simply to help President Obama or enhance Hillary Clinton's election chances. That is ludicrous. So if you are saying that the Fed won't hike in November for those reasons, I think you are wrong.
But I am going to give some on this issue in another dimension. Elections are risk events, and a risk management strategy thus demands that they be considered when making policy. And we know that in fact the Federal Reserve considers elections when making policy. New York Times reporter Binyamin Appelbaum caught Yellen by surprise at the press conference with this question:
BINYAMIN APPELBAUM. Binya Appelbaum, the New York Times. In the run-up to the Brexit vote earlier this year, several Fed policymakers cited it as a reason that they were reluctant to raise rates in June because of the uncertainty associated with that vote. In the run-up to the presidential election, I have not heard any Fed policymaker give that as a reason that they might want to delay raising rates in November. Could you explain why the Fed regards Brexit as a greater danger to the American economy than the presidential election that’s actually happening here? And, second, there were three dissents at this meeting. Could you explain what the cause of disagreement was, what those policymakers thought?
CHAIR YELLEN. So we are very focused on evaluating, given the way the economy is operating, what is the right policy to foster our goals, and I’m not going to get into politics.
Appelbaum nailed that one – we can't credibly believe that the Brexit vote is a more relevant risk for the US economy than this presidential election. Yet the Fed is asking us to believe exactly that. If you can't comment on how US elections impact Fed policy, you shouldn't comment on how foreign elections impact Fed policy. Just chalk it up to “global economic uncertainty” and move one. The Fed really messed up by identifying the Brexit vote as a reason to hold rates steady.
This also doesn't seem like a win for the Fed's communication strategy. Live and learn.
Finally, when considering the risk management issues, don't let New York Federal Reserve President William Dudley's latest speech slip by you. He questions the effectiveness of unconventional monetary policy:
Given the initial novelty of unconventional monetary policy tools, central banks did not have a well-developed body of research to draw on to design the programs and calibrate their impact. While it will take time to build this body of work, research to date varies in terms of the estimated effectiveness of unconventional policy. Several studies indicate that the FOMC’s first asset purchase program helped to reduce long-term interest rates, while the subsequent programs had smaller though still significant effects on rates. However, Professor Summers, who is participating in our program, has recently questioned the effectiveness of the Fed’s asset purchase programs when financial markets are well-functioning.
And then he considers the implications for monetary policy (emphasis added):
There is a related concern given that the federal funds rate is still close to zero at this point in the expansion. While I’m on record as saying that expansions do not simply die of old age, some economists are concerned that the risk of a recession is increasing. As I indicated earlier, the FOMC was able to reduce the federal funds rate by more than 5 percentage points in an effort to offset the effects of the last recession. If another recession were to happen in the next few years, it is likely that the FOMC would be unable to respond with a cut of such magnitude. In this case, the effectiveness of unconventional monetary policy in providing accommodation would again become a central issue, as Chair Yellen discussed in her recent Jackson Hole speech. A risk management approach to monetary policy would suggest that the more concerned one is with the effectiveness of these policies at the zero lower bound, the more cautious one would be in the process of removing accommodation. So, even though we are now slightly off the zero lower bound, an assessment of the effectiveness of unconventional monetary policy has implications with respect to the current stance of monetary policy.
Recessions don't die of old age, that's true. But the fact that Dudley even mentions rising risks of recession among “some economists” is notable. And note the time horizon of his concerns – the next few years! He must have a tingle in the back of his head saying that we are closer to the end than the beginning, and we still don't have adequate policy room, nor can we get adequate policy room by hiking rates because that will only accelerate the onset of the next recession. So the only thing they can do is delay (although not clear why he should consider a rate hike wise at all if he concedes to recession concerns). Such an argument will continue to dominate over the preemptive strike argument (see Richmond Federal Reserve President Jeffrey Lacker for the extreme view on that point) in November.
My takeaways on Fed communications over the last week are thus:
- If you are only going to hike once a year, it is difficult to see why that hike would come at a meeting without a press conference. Clearly, it is not as if the timing of that one hike is really all that critical. You just have to learn to live with the reality that it will be hard to describe all eight meetings a year as “live” when you hike in only one of them. Live with the fact that at least half will end up effectively as “dead.” And guess what? You determined which were “dead” with the decision to only have a press conference at every other meeting.
- Don't try to talk up a rate hike with the only purpose of keeping the drama surrounding the meeting alive. That is not helping market participants understand the factors driving policy.
- Don't try to talk up the market odds of a meeting just to attempt to gain a tactical advantage at that meeting. That seems to me to be what Fed hawks have been doing this year. The doves just aren't buying the preemptive strike argument. And they won't if market odds for a meeting are 50% rather than 15%. Wait until December.
- If US politics are off limits, then foreign politics need to be off limits. It is very hard to explain why US politics don't matter for policy when foreign politics do matter.
Bottom Line: I am hard pressed to see the way forward to a November rate hike. Seems that delay will still dominate over preemptive strikes in November.