Sleuthing for Fed Dots Hints at Yellen Plotting Three ‘17 Hikes
- January 31, 2017
- Posted by: MIB
- Category: US
By Rich Miller and Christopher Condon
(Bloomberg) — Has Federal Reserve Chair Janet Yellen been
outed as favoring three interest-rate increases this year, as
opposed to a more dovish two?
That’s the buzz making the rounds among hard-core Fed
watchers as they parse an outpouring of comments by policy
makers over the past four weeks.
“Yellen likely put down three hikes” for 2017 when Fed
policy makers submitted projections in December, according to
Laurence Meyer, a former Federal Reserve governor who now heads
a policy analysis firm in Washington that bears his name.
Meyer is playing a game of elimination popular among
investors and economists that revolves around the so-called dot
plot. That’s a graphic layout that the Fed publishes every three
months to show where policy makers think interest rates should
go if their forecasts for the economy prove accurate. The
quarterly rate projections don’t identify the author of each
forecast, which is represented by a dot on a chart.
The latest dot plot, released the same day the Fed raised
its benchmark lending rate on Dec. 14, caught investors on the
hop by showing the median projection was for three increases in
2017 rather than the more dovish two expected in September.
Yellen is widely perceived as a dove, or a policy maker who
focuses more on lowering unemployment than containing inflation.
She also downplayed the change in rate projections when she
spoke to reporters after last month’s meeting, saying it was
just a quarter-point increase. That may have caused many
investors to assume she is among the two-hike dots.
If Yellen is indeed among those expecting three rate hikes,
that would increase the likelihood that the central bank will
follow through with that number, given her sway over other
members of the Federal Open Market Committee, which sets
interest rates. It could also provide another jolt to investors,
who still expect only two moves this year after one in 2016,
according to trading in interest-rate derivative contracts.
Meyer said he used a process of elimination to peg Yellen
at three, backed by his view of the chair as adept at building
consensus on the committee, and by her increasingly rosy view of
the economy in the short term. “I put a lot of weight on the
fact that she has a very positive view of the economy,
particularly on inflation,” he said.
While the Fed chair has repeatedly refused to say where she
stands on the dot plot, other officials have not been so
reticent about their positions. And their comments and actions
have helped Fed watchers use a process of elimination to
pinpoint which dot they believe is Yellen’s.
For the central banking nerds out there, here’s how the
reasoning breaks down. In December, two of the 17 FOMC
participants projected just one hike in 2017, four expected two
hikes and six called for three. The others forecast an even
faster pace of tightening.
On the first rung stood St. Louis Fed President James
Bullard — who said on Dec. 16 he expects the central bank to
raise rates just once in the next three years — and outspoken
dove Governor Lael Brainard, several Fed watchers said.
Atlanta Fed President Dennis Lockhart told reporters on
Jan. 9 that he had forecast two hikes this year. His Chicago
counterpart Charles Evans suggested he’s also looking at two,
saying on Jan. 6 that a couple of moves were “not an
unreasonable expectation.” Next, Governor Daniel Tarullo, who in
the past has advocated a decidedly cautious approach to raising
rates, also got ranked at two hikes by several economists.
With a single two-hiker remaining, there is one more firm
clue: In December, in the run-up to the FOMC meeting, the board
of directors at the Minneapolis Fed was alone among the regional
banks when it voted against increasing the so-called discount
rate, which establishes interest rates for direct loans from the
Fed. They did so to support the labor market and allow inflation
to rise, according to minutes published on Jan. 10.
A reserve bank’s position on the discount rate typically
reflects its president’s view with respect to the benchmark
federal funds rate, suggesting Minneapolis Fed President Neel
Kashkari isn’t hawkish enough to forecast more than two hikes
this year on the dot plot.
If that’s correct, Yellen and New York Fed President
William Dudley are among the six policy makers forecasting three
hikes in 2017.
While Dudley hasn’t given any public comments to indicate
where he stands on the dot plot, Yellen has arguably affirmed
the conclusion that she forecast three hikes. She said in a Jan.
12 speech that U.S. economy faced no serious short-term
obstacles, signaling she would be comfortable with a faster pace
of monetary tightening. “Inflation has moved up from a very low
level, and it’s a little bit under our 2 percent objective, but
it’s pretty close,” she said.
Other economists cautioned that it’s impossible to know for
sure which official corresponds with each dot, adding that the
importance of Yellen’s position is limited by the uncertainty
overhanging the Fed’s economic forecasts. And uncertainty is
especially high given the lack of clarity over the incoming
Trump administration’s plans on everything from infrastructure
spending to tax cuts. About half of the FOMC participants
included assumptions of more expansionary fiscal policy in their
forecasts, according to the minutes of the December meeting.
“It doesn’t really matter” whether Yellen is at two or
three, said Michael Gapen, chief U.S. economist at Barclays Plc
in New York and a former Fed economist. “The over-arching
message is the Fed’s not the only game in town anymore, and they
know it. They’re going to respond to fiscal policy.”
Gapen put Yellen at two hikes, but said a case could be
made for her at three.
Luke Tilley, chief economist at money manager Wilmington
Trust Corp. and a former staffer at the Philadelphia Fed,
offered another warning even as he agreed that Yellen likely
projected three hikes.
“These are not telegraphed intentions, but expectations,”
he said. “They’re willing to move them up or move them down
based on how they see the economy.”