According to the latest Reuters meter of Fed “doves and hawks”, the Atlanta Fed’s Bostic, Boston Fed’s Rosengren and Chicago Fed president Charles Evans are all Hawks and, at worst, centrists. None of them is seen as a dove, per se.
And yet the trio of Fed “hawks” were scrambling over each other who could be more dovish today during their various speeches, confirming that the Fed has indeed undergone a seachange in sentiment, from being starkly hawkish as of the December FOMC meeting just three weeks ago, to uber dovish following Powell’s dramatic retreat last Friday.
The non-voting in 2019 Bostic was first, saying the Fed should be cautious about making additional interest rate hikes because rates are now close to neutral and businesses are uncertain about the outlook: “My view is that a patient approach to monetary policy adjustments in the coming year is fully warranted in light of the uncertainties about the state of the economy and about what level of policy rates is consistent with a neutral stance.”
Speaking at the Chattanooga Chamber of Commerce, Bostic said that “all the available evidence at the moment points to caution regarding firms’ approach to expansion’’ and added that “as long as that caution exists, I suspect it will act as a natural governor, limiting inflationary forces without the need for a muscular stance of policy.“
He continued his cautious commentary, saying that “grassroots intelligence from Main Street and messages from Wall Street indicate heightened uncertainty and concern about the economy’’ and added that “worries over tariffs and trade have dominated the conversations about the outlook and are present in the survey evidence we collect.”
He also noted his concern over potential escalation of trade wars, saying that “while businesses appear to have absorbed the initial rounds of tariffs, should tariff rates increase from here or encompass a broader set of goods, my contacts have said this would likely create significant challenges.”
Finally touching on the market, Bostic said that he views “recent market turmoil as not the cause, but a symptom of the various concerns and uncertainties surrounding the outlook” including “slowing global growth, uncertain trade policy, worries over the trajectory of growth domestically, and concern regarding the expected stance of monetary policy.”
But the most notable part of Bostic speech came when a reporter asked if he was saying that the next interest-rate move could be an increase or a cut, Bostic responded “yes” explaining that he is “open to a rate cut” if downside risks all come to bear and noting that “we need to signal we are not locked into a particular trajectory for policy” while adding that “If things evolve in ways that suggest that the downside risks all come to bear at the same time and we start to see significant weakness, I would be open to seeing our policy response to try to mitigate the negative aspects of that.”
“I am comfortable hanging out and seeing if there is evidence that monetary policy is accommodative.”
Bostic’ comment led to a sharp drop in the US Dollar while the euro reached its highest level against the greenback since October.
A dovish Bostic was followed by an equally dovish (and non-voting in 2019) Chicago Fed president Charles Evans, who said that while he still expects 3 rate hikes in 2019 if his forecasts are met, added that “we’re at a point where inflationary pressures are not evident” and claimed that “we do have capacity to not adjust rates for some period of time.”
Speaking with reporters after a speech in Riverwoods, Illinois, Evans said that “there’s no hurry in getting” Fed policy into restrictive territory and that “It could be that neutral is actually a little bit lower than what I just said, and if in fact we’re arguably at a lower range for neutral, that means we could be at neutral, and so if the inflation data didn’t move up.”
“It could be that some of these tensions resolve themselves and we don’t need to adjust policy” said Evans, leaving unsaid that the Fed may just launch QE4 if tensions don’t resolve themselves.
Still, there was some hawkish tones to his comments, such as his claims that “we’re sort of at this point where, economy continues to go like the December employment report, international situation works out pretty well, inflation goes a little above 2 percent, we clearly want to be at neutral, a little bit above”
“Given my outlook, given that I think things will play out reasonably well without unforeseen negative shocks, I think we want to go to slightly above neutral. That ends up in my book being the 3, 3.25 percent range. I did think in December that we could do that by the end of 2019… I think that timing is not at all important. My increases for 2020 were zero.”
The trio of hawks doves concluded when Boston Fed President Eric Rosengren said China’s economy faces a combination of problems and he worries it may slow more than anticipated, in effect pulling a “Yellen” who blamed the massive delay in rate hikes in 2016 on China.
“They have a lot of financial stability issues because there’s a lot of leverage in the Chinese economy, so that there’s much more risk that if the government doesn’t get it under control then it could be a much more severe problem, and obviously when you think about trade disruption, they’re the country most impacted by the concerns about trade war,” Rosengren said.
Commenting on the US markets, Rosengren said they ended 2018 on a sour note that raises a concern about the durability of the expansion, even though the market’s reaction clearly left him surprised, noting that “the economic data have not seemed to support the kind of financial market movements we’ve seen to date.”
Importantly, Rosengren said that levels of corporate debt were a concern, including credit extended through non-bank lenders, and said that while fiscal policy is still providing stimulus to U.S. economy, in the long run fiscal deficits are unsustainable and this will have to reverse as debt level becomes unsustainable. Eventually… just not yet.
There was an amusing moment when Rosengren said that it “catches his attention when short-term rate futures start pricing in rate cuts” although it wasn’t clear if he supported or was against such rate cut moves. Even so, he specified that the Fed is “mildly accommodative” now, and he is “perfectly content to stay there.”
The Boston Fed president said that he prefers to rely on adjustments of short-term rates, not to the balance sheet, which should remain “on autopilot”… but wouldn’t rule out changing balance sheet policy in the event of a “dramatic slowdown.”
In other word, according to Rosengren, and the overall trio of doves, while nobody really knows what’s going on, a “dramatic slowdown” will be sufficient to not only end QT, but – drumroll – launch another round of QE (especially with the US deficit expected to rise will north of a trillion dollars this year, and someone will have to fund it).
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