It’s an extraordinarily busy week for the Federal Reserve–verbiage wise.
Saturday, January 5, John Williams, head of the New York Federal Reserve Bank, Raphael Bostic of the Atlanta Fed, and Mary Daly of the San Francisco Red all spoke.
Today, January 7, Bostic speaks again.
Wednesday, January 9, Bostic one more time, plus Charles Evans of the Chicago Fed and Eric Rosengren of the Boston Fed. In addition the minutes from the Fed’s Open Market Committee’s December meeting are due for release
And then, on Thursday, January 10, more talk from Powell himself and Fed Vice Chair Richard Clarida, and Thomas Barkin of the Richmond Fed and James Bullard of the St. Louis Fed.
Whew!
In some fantasy world, all those speakers would deliver the same message. In the real world, there’s likely to be some significant differences of opinion among those Fed speakers. How big a difference? is the question.
In that fantasy world, and, in my opinion, that unified message would try to convince the financial markets, which as of Friday were pricing in no interest rate increases at all for 2019 and an interest rate cut in 2020, that the Federal Reserve is serious when it says that an interest rate increase or two are still on the table for 2019–depending on trends in the economy and inflation (and in particular wage inflation.)
I wouldn’t expect that Fed would to try to completely reverse market pricing expectations overnight–that abrupt an about face would send the stock market tumbling and the Fed is really hoping to avoid a big fast move to the downside that could panic the economy into a recession. But I think the Fed would like to see the market start pricing on some chance of an interest rate increase in 2019. Maybe a move from the 0% odds that the CME’s FedWatch tool now calculates to, say, 30% or 40%.
The Fed’s problem now is that with expectations for an interest rate increase at 0%, the U.S. central bank is boxed in on policy. A move to raise rates in, say, May or June, if expectations remain at 0% could produce exactly the kind of overnight tumble that leads to bad outcomes down the road. Better to have the market think that a rate increase is unlikely but not impossible, which I think it is at the moment, so that if the data change the Fed can respond with a rate increase without blindsiding the market.
The Fed chair isn’t a dictator, however, and there’s a question of how much clout Powell has to meld dissenting voices into a unified message. President Donald Trump’s attacks on the Federal Reserve and his threats to remove Powell as chair have almost certainly helped Powell’s internal position at the bank. None of the governors of the bank want to weaken Powell at a time like this.
See if all these Fed speakers deliver something like a unified message convincing enough to shift expectations for potential interest rate increases in 2019. Even a shift in expectations at this point would put some downward pressure on U.S. stocks.
