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Hawkish-tilting Fed could move rates quicker in 2018
WASHINGTON, Jan 29, 2018 (BSS/AFP) – The Federal Reserve likely will leave
the benchmark US interest rate untouched next week, but economists say the
changing composition of the policy committee could point to faster rate hikes
in 2018.
Markets are betting the first of the three interest rate moves expected
this year will come at the Fed’s next meeting in March.
That will allow the Fed’s interest-rate setting body, the Federal Open
Market Committee (FOMC), to wait for firmer signs of inflation, which has
long run below the Fed’s two percent target.
But changing economic conditions — the massive tax cuts approved last
month, recovering energy prices, a weaker US dollar, new trade tariffs and
stronger global growth — could combine with a widespread US labor shortage
to spur wage gains and cause a demand-driven rise in inflation, analysts say.
At the same time the changing makeup of the FOMC appears to be leaning in
a more hawkish, inflation-averse direction, which raises the chances the
committee will raise rates four times rather than three.
“It looks like in 2018 it will be justified to be more hawkish,” Diane
Swonk, chief economist at Grant Thornton, told AFP. “You’ll get doves
becoming more hawkish much more rapidly when conditions are changing.”
The 12 presidents of the regional Federal Reserve banks rotate as voting
members of the FOMC each year, along with members of the Fed Board of
Governors who always vote.
Chicago Fed President Charles Evans and Minneapolis President Neel
Kashkari, who both opposed last month’s rate hike, will not vote this year.
But Cleveland’s Loretta Mester, who twice dissented in favor of higher
rates in 2016, will become a voter.
Mester will be joined by San Francisco’s John Williams, a centrist and
ally of outgoing Chair Janet Yellen, and the Atlanta region’s newly-appointed
Raphael Bostic, who is an unknown but pegged as a dove by analysts at IHS
Markit.
Thomas Barkin, who took over this month as president of the traditionally
hawkish Richmond Fed also will be voting for the first time.
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– A more challenging environment –
This week’s meeting will be Yellen’s last, and once she steps down at the
start of February, President Donald Trump is in a position to stack the Fed’s
Board, with the chance name all but one of its seven members.
Jerome Powell, who will take over as Fed chair, has served on the board
with Yellen since 2012 and is unlikely to depart too easily from the path she
charted, having supported her post-crisis policy of painstakingly cautious
rate increases.
But observers say the jury is still out on conservative Trump nominee
Marvin Goodfriend, a university professor and former Richmond Fed adviser.
Goodfriend struggled in Senate testimony this month to explain why his
predictions of “disastrous” post-crisis inflation had been wrong. He has
frequently called for higher rates and scolded the Fed last year for failing
to guard against the risk of rising prices — but also favors allowing even
negative rates when needed to stimulate growth.
University of Oregon economist Tim Duy, a keen Fed observer, told AFP the
Fed would do well to avoid overreacting by raising rates more than three
times.
“They will need to be wary of the long and variable lags in the policy
process; they will need to take some time to see the impact of their past
tightening,” he said.
“So I tend to think you need further evidence of excessive inflationary
risks before they ratchet up the pace of rate increases.”
With Wall Street forging ever higher, Swonk of Grant Thornton said the Fed
may also feel compelled to respond to prevent a bubble in asset prices, even
though monetary policy tools are ill-suited to address those issues.
“So far, Chair Yellen gets to leave without leaving a ripple on financial
markets,” Swonk said.
“That’s great to leave on that note and the ripples may be yet to come.”
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