Atlanta Fed President Dennis Lockhart, who is a voting member of the FOMC, seemed to echo the prevailing message of the Fed committee when he commented on the appropriateness of a September rate hike earlier this week.
Naturally, this prompted Fed Governor Jerome Powell to suggest that nothing about a September rate increase has been decided (by himself of the committee at large), expressing uncertainty over the mixed nature of recent economic data and the slew of important reports that will be released prior to the September 16-17 meeting.
The timing of Mr. Powell’s statement, made on broadcast television, is anything but coincidental following Lockhart’s strong words on Tuesday. Most observers consider Mr. Lockhart to be one of the more centrist members of the FOMC, making him a fair barometer of the committee’s consensus. (Confusing matters further, Powell is also considered a monetary centrist.) Not only did Lockhart indicate that the economy ought to be on track for a September rate increase, he went as far as saying it would take “significant deterioration” of the current economic outlook in order to stave off the Fed choosing to raise the federal funds rate at the mid-September policy meeting. With such powerful rhetoric, Lockhart (perhaps somewhat naively) all but confirmed to the markets that the FOMC plans on its first rate hike in a decade at next month’s meeting.
Pushing Back on Monetary Hawks
Clearly, the Federal Reserve would like to avoid telegraphing its intentions about the timing of its tightening the country’s monetary policy. This is in reaction to the last rate increase regime at the beginning of the last decade, where the Fed very clearly laid out its plans about the timing and pace of rate hikes; this gave savvy traders too direct of a gameplan about the Fed’s intentions, making it easy to manipulate market action right before the announcement of each successive rate increase.
The central bank has done everything conceivable to steer clear of such telegraphing this time around, rendering Lockhart’s overly definitive comments all the more surprising. Fed Chair Yellen has been adamant that the FOMC will remain “data-dependent,” a useful euphemism for “even we don’t know where things are going.” In addition to the claim of relying on yet-unknown economic data, the committee has also been keen on its voting members providing “balanced” (read: conflicting) opinions on the future direction of Fed policy. This is where Powell’s damage-control refutation of Lockhart’s comments fits into the narrative.
What to Expect from the Fed
So long as the near-term path of monetary policy remains at least somewhat in doubt, the FOMC must continue to hide behind ambiguity or risk providing overly clear signals to enterprising traders—thus also providing actionable moves for these traders to capitalize upon. You don’t need a crystal ball to see that the Fed wants to raise rates soon to maintain its credibility, but will almost certainly keep subsequent rate increases shallow and spaced out. How the Fed achieves this will depend on how well it can stay ahead of market expectations. Consistently offering contradictory characterizations of its intentions seems to be its favored method thus far.