Hawkish Rumblings

Fedspeak from the Jackson Hole conference suggests that the more hawkish FOMC participants are sticking to their guns.  Cleveland Federal Reserve Bank President Loretta Mester, via the Wall Street Journal:

“I want to take the time I have between now and the September meeting to evaluate all the economic information that’s come in, including recent volatility in markets and the reasons behind that,” Ms. Mester said. “But it hasn’t so far changed my basic outlook that the U.S. economy is solid and it could support an increase in interest rates.”

Then there is St. Louis Federal Reserve President James Bullard, via Bloomberg:

“The key question for the committee is -- how much would you want to change the outlook based on the volatility that we’ve seen over the last 10 days, and I think the answer to that is going to be: not very much,” Bullard told Bloomberg Television in an interview Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.

“You’ve really got the same trajectory that the committee will be looking at that we were looking at before, so why would we change strategy, which was basically to lift off at some point,” said Bullard, who votes on the FOMC next year...

...“The committee does not like to move when there’s volatility,” he said. “If we had the meeting this week, people would probably say let’s wait.”...

...He added, “but the meeting is not this week, it’s Sept. 16 and 17.”

Bullard does not want financial market turmoil to derail his long-supported rate hike. He is hoping all this noise just fades away over the next few weeks. And he wants to open up the October option:

Bullard also said he would support scheduling a press conference following the Oct. 27-28 FOMC meeting if the committee doesn’t raise rates next month. That would make it easier for the Fed to explain a liftoff in October.

Bullard has repeatedly sought a press conference for every meeting, to no avail. I agree with him. The Fed has reinforced the view that major policy shifts are limited to only four of the eight meetings a year. Ridiculous and unnecessary. There should be a press conference at every meeting. That said, they can't now announce a press conference for October because it will be taken as a clear signal of a rate hike on that date. After they get the first hike out of the way, then they should switch to a press conference with every meeting.

Here Bullard disappoints:

“I actually think we’re OK on the inflation front,” Bullard said. “I’ve been arguing that we should get going, because interest rates -- it’s not that we’re a little bit below normal, we’re all the way down at zero, so you’ve got to think about: How is this going to play out over the next two to three years.”

I can remember when Bullard had a reliable view on inflation. When inflation deviates from trend, you act. But the inflation picture is not friendly for hawks and even less so after this morning:

Core-PCE inflation decelerated to a meager 0.87 percent annualized rate in July. The uptick in near-term inflation had provided strong support for a September rate hike as it was consistent with the view that last year's disinflation was temporary. That no longer looks to be the case, pulling apart the argument that the Fed can be confident that inflation will trend back to target. If anything, all the monthly data looks like noise as inflation slowly drifts further and further away from target.

Moreover, I would have thought that Bullard would give more weight to market-based measures: 

I believe Bullard is increasingly held by the siren-song of the Neo-Fisherians, thinking the only way to raise inflation is to hike rates. Good luck with that.

I like this from Greg Robb at MarketWatch:

Fischer just trying to show the Fed is as cool as the underside of your pillow http://t.co/6HjoYsLYsA

— Greg Robb (@grobb2000) August 28, 2015

 Fischer went into this interview with the goal of leaving September open. Via CNBC:

"I think it's early to tell: The change in the circumstances which began with the Chinese devaluation is relatively new and we're still watching how it unfolds, so I wouldn't want to go ahead and decide right now what the case is—more compelling, less compelling, etc.," he said.

Fischer was trying not to tip his hat as much as New York Federal Reserve President William Dudley did on Tuesday. Or even arguably trying to pull back Dudley's comments as they had seemed to close off September.  Perhaps more telling, when asked about the PCE numbers, Fischer reiterated his confidence that inflation will trend to target, citing the transitory nature of the oil shock. This is somewhat disappointing given the data and his dovish comments on inflation just two weeks ago. But then again, he couldn't take a dovish stance if his intent was to keep September on that table.

 

Where does Fischer get his confidence on inflation? A basic Phillips curve story. It is the story that makes a September liftoff compelling. He believes the labor market is near full employment and that you need to move ahead of the inflation curve:

Still, he added that he has not seen "much evidence" of increasing risks to staying at near-zero rates for longer, but he also said he didn't want to wait too long. 

"When the case is overwhelming, if you wait that long, you'll be waiting too long," he said. "There's always uncertainty."

The Fed very much wants to ignore the inflation data and follow the labor markets. And even as inflation drifts further away from their target, they keep doubling down on their bets. It's what the Phillips curve is telling them they should do. 

Bottom Line: The Fed doesn't want to take September off the table. Many officials had what they believed was a solid case for hiking rates at the next meeting, and they don't want market turmoil to undermine that case. And that case is not complicated. It's the Phillip curve combined with an estimate of full employment (an estimate of full employment that remains sticky despite the persistent downtrend in inflation). If they move in September, that's the story they will run with. They don't have another paradigm.