We tend to take the pronouncements of the Federal Reserve as the all-knowing position of its chairman, with the unanimous support of his or her colleagues.
Yet in reality, reaching a rate-setting decision, as well as handling the media announcement afterwards, requires extensive debate and the balancing of often fundamentally opposing views amongst the members of the Federal Open Market Committee.
The market expected, prior to the recent volatility in share prices, that the Fed would raise the reserve rate at its next meeting in March. That may still be the case, but comments reported on Bloomberg by James Bullard, president of the Federal Reserve Bank of St. Louis, highlight just how wide the range of views can be among the Fed's members, ranging from doves to hawks.
Bullard said the recent stock market rout was the most predictable selloff ever and should have come as no surprise given the elevated valuations of technology stocks and the absence of any recent price falls.
“Something that has gone up 40% like the S&P tech sector will at some point have a sell-off”.
Not that Bullard believes that the market is correct in interpreting a surge in average hourly earnings as contributing to the rising Treasury yields.
Bullard does not see wage growth as currently inflationary and remains confident that inflation will not derail robust U.S. GDP growth in the year ahead, saying he doesn’t see a need for the Fed to raise rates further while inflation is stuck below the central bank’s 2% target.
Indeed, Bullard appears more concerned with longer-term, persistently low U.S. growth and although he is not among those Fed's members who will be voting on monetary policy this year, his position is that there is little need to raise interest rates much in 2018 is still influential.
Compare that to the views of incoming Fed Chairman Jerome Powell, who is expected to follow Janet Yellen’s line of cautiously raising rates.
The market was widely expecting three rate rises in 2018 from Powell, but in recent weeks stronger wage growth and rising concerns about inflation have prompted more hawkish voices to call for four, with the first in March and the last one in December 2018.
What is less clear is what his policy will be on reversing quantitative easing. Considerable debate remains over how quickly the central bank should move to policy normalization and unwind its $4.5 trillion balance sheet.
Hawks point out that sooner or later there will be another recession (the current bull market, if it continues over 2018, will become the longest in history).
At present, the Fed has little or no tools left in the bag to tackle another recession — with rates still low and a massive balance sheet, it hardly needs to add more hazard.
by Stuart Burns