The pace of US interest rate hikes is about to accelerate. Recent comments by Boston Federal Reserve President Eric Rosengren suggest this. He has followed Fed Chief Jerome Powell and Fed Governor Lael Brainard in taking a more hawkish stance.
Rosengren, on Friday, gave a speech entitled “Perspectives on the Economy and Fed Policy: Why Continuing to Remove Monetary Accommodation is Appropriate“. In that speech, he said that the Fed needs to “remove monetary policy accommodation at a regular but gradual pace”. But he also went on to say policy tightening would be “perhaps a bit faster”. His overall messaging was in line with hawkish comments made by other Fed officials recently.
Rosengren’s evolution on Fed policy
Rosengren was rather dovish during the quantitative easing regime. He felt the economy was growing below potential and needed a full-on assault from the Fed. But, gradually, he has become more comfortable with growth prospects in the US economy. And his views on monetary policy have evolved as a result.
In 2014, Rosengren expressed support for the Fed’s large scale asset purchases, also known as quantitative easing or QE. Then known as one of the Fed’s doves, the Boston Fed President said quantitative easing had reduced inequality.
Moreover, he also advocated further unconventional policy measures should the Fed cut rates to zero in the next downturn. Rosengren said the Fed could raise its inflation target above 2%, for example.
Back then, Rosengren believed then that the Fed should keep interest rates low unless wage and price inflation surged. He advocated doing so even if the unemployment rate fell below the Fed’s long-term target. The Fed had tapered its purchase program when Rosengren made these remarks. So he was suggesting ‘lower for longer’ as a way for the Fed remain accommodative after QE. And he felt the Fed should do so even if the rate of unemployment caused angst about inflationary pressure.
In 2015, Rosengren also maintained that:
(1) a significant undershooting of the inflation target should be treated with the same policy urgency as a significant overshooting of the inflation target; (2) that open-ended quantitative easing tied to policy goals is likely to be much more effective than limited quantitative-easing programs
Rosengren supports Powell’s regime shift
Fast forward to 2016, and Rosengren had become less dovish. He was saying that the US was close to meeting the economic pre-conditions the Fed had put in place for hiking rates. “I want to be sensitive to how the data comes in, but I would say that most of the conditions that were laid out in the minutes, as of right now, seem to be . . . on the verge of broadly being met,” the Boston Chief said.
Now, Rosengren supports an accelerated rate hike timetable.The Boston Fed put up a vetted summary of Rosengren’s remarks for the Springfield Regional Chamber Outlook 2018 in Springfield, MA on March 9th. This particular part ending the Fed press release stuck out as significant:
He also noted that recent volatility in stock and bond markets likely reflects, in part, the realization that financial markets need to factor in the risk that wages and prices could grow too quickly in the event of too much fiscal and monetary stimulus, “particularly with the economy currently at or beyond full employment, and inflation approaching the Fed’s goal.”
“To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace,” Rosengren said, “and perhaps a bit faster than the three, one-quarter point increases envisioned for this year” in the December projection of appropriate policy by Fed officials.
Rosengren said that this expectation assumes, of course, the data continue to come in more-or-less consistent with his outlook.
The takeaway for fixed income markets
- The Fed is now actively preparing markets for a potential 4th rate hike in 2018, data permitting.
- Even the most dovish of Fed officials is onboard with Chairman Powell’s regime shift toward an accelerated rate hike timetable.
- Fed officials see market volatility as a sign asset markets are coming to grips with Fed policy messaging. For the Fed, increased market volatility is not necessarily a bad thing then.
Also see the Wall Street Journal’s Michael Derby on this. He notes Rosengren saying persistently low inflation has been caused by “transitory” factors. This gives cover for rate hikes despite inflation below the Fed’s target.