Robert Eisenbeis is Cumberland Advisors' vice chairman andchief monetary economist. Prior to joining Cumberland, he was executive vicepresident and director of research at the Federal Reserve Bank of Atlanta. Heis a member of the U.S. Shadow Financial Regulatory Committee and the FinancialEconomist Roundtable. The views and opinions expressed in this piece represent only those ofthe author and are not necessarily those of S&P Global Market Intelligence.
Inthe wake of Chair Janet Yellen's speech in New York on Tuesday, economiccommentators and pundits have already begun speculating on the prospects for asecond rate hike at the Federal Open Market Committee's April meeting. Myassessment is that, given the current flow of economic data and the discussionby Chair Yellen, the probability of a policy move in April is low, if not closeto zero. This is notwithstanding her assertion that each meeting is a livemeeting when it comes to consideration of policy moves. Several reasons pointto this conclusion.
First,in her speech, Chair Yellen discussed the committee's assessment of theeconomy, which she then supplemented with her own views. She made it abundantlyclear that the committee "expects that economic conditions will evolve ina manner that will warrant only gradual increases in the federal fundsrate." Part of the rationale for this assertion is that, since the lastpolicy move in December, significant developments have warranted a morecautious approach. These include the continued movements in oil prices, theintroduction and expansion of negative interest rates by major central banks,the slow pace of investment, lackluster business sentiment, the appreciation ofthe dollar, the slow pace of household formation, and committee concerns aboutspillover to the U.S. economy from slow growth abroad. All of these factorshave heightened the downside risks to the committee's overall growth forecast,even though the basic trajectory hasn't been significantly reduced. Managementof downside risks is a key concern of the FOMC at this point, and the perceivedrisks have increased more since the last meeting, when the decision was madenot to change rates again.
Second,the inference from the analysis Chair Yellen offered is that the increase indownside risks would have been greater were it not for changes in marketexpectations that have put downward pressure on longer-term interest rates thattends to provide additional support for continued spending by consumers and, hopefully,businesses as well. Thus, market reactions actually acted as a substitute foreasing by the Fed. This easing tended to support the basic trajectory for theeconomy in the committee's forecasts and tended to mitigate what mightotherwise have been a reduction in that trajectory.
Third,Yellen expressed some concern about the inflation outlook and the speed atwhich it will return to the committee's 2% objective. She argued that PCEinflation will remain well below 2% throughout 2016 and then move onlygradually up through 2017 and 2018. Clearly, if foreign growth slows and oilprices once again decline, these factors will slow the evolution of inflationtowards the committee's objective. But at the same time, such a development iscritically dependent upon the stability of expectations for future inflation.Here, too, Chair Yellen notes her concerns that inflation expectations mayactually be drifting down, based on both market-based measures and reportedexpectations in the Michigan Survey. For these reasons, the FOMC can reasonablyconclude there is no need to rush to make another rate move.
Fourth,given all these concerns, uncertainty has increased regarding when the economymight attain the committee's objectives and how that timing might affect thefuture rate moves. As we have argued in previous commentaries, key data onfirst-quarter real GDP will not be available until June, so the committee willhave only one additional observation on employment and inflation by theupcoming April meeting; and recent data on corporate profits, consumerspending, and housing and durable goods, including goods for businessinvestment, are not consistent with an economy that is growing rapidly or atrisk of overheating. These data are simply not consistent with an April policymove.
Finally,if there is little or no chance of a policy move in April, why the insistencethat each meeting is a live meeting? The reasoning here seems obvious. Policymoves should be decided at official meetings, not through informal consensus inadvance of, or instead of, an actual meeting. Preserving optionality, even ifthere is little or no probability of a rate move, is critical to the integrityof the decision-making process. Otherwise, there would be no need to meet if anactual policy move was not on the table. But the preservation of optionalityalso means that markets do not need to take literally the assertion that eachmeeting is live.