Federal Reserve regional presidents are hitting the talk circuit, pushing an idea that was unthinkable until now: raising benchmark interest rates only days before November’s Presidential election.
Who are these ultra-hawks, and how much support do they have within the Fed?
The speculation began Monday, when Cleveland Federal Reserve president Loretta Mester thought aloud the unthinkable. Calling the case for a November rate hike “alive” and “compelling”, Mester told Bloomberg TV that the Fed needed to take preemptive action before inflation got a head start. “we’ve learned over history that the Fed should be looking ahead and not just waiting.” Mester was one of the three voting member on the FOMC who voted to raise interest rates in September.
The theme of keeping the chance of a November rate alive fell to ultra-hawk Richmond Federal Reserve president Jeffrey Lacker on Tuesday. Well-known as the most aggressive of Fed presidents when it come to monetary policy (he
championed against QE before it began), Lacker doesn’t vote in the FOMC this year. His voice is still heard, though, as all Fed regional presidents attend the FOMC policy meeting, whether they hold one of the rotating voting positions or not. To no one’s surprise, Lacker said he would have dissented in favor of raising rates in September, if he had had a voting seat.
In his speech Tuesday, Lacker repeated Mester’s call for preemptive rate hikes. calling them “likely to play a critical role in maintaining the stability of inflation.” Saying the Fed should raise rate gradually “but not too gradually,” he said that benchmark interest rates would ideally already be at 1.5%. Like Mester, Lacker said that waiting too long to raise interest rates now will force the Fed to make larger, faster rate hikes in the future.
While not mentioning November as a “live” possibility for a rate hike, San Francisco Fed president John Williams last week said in an interview that “It is getting harder and harder to justify interest rates being so incredibly low given where the U.S. economy is and where it is going.” Saying that he supports an interest rate increase now, Williams outlined his concerns about keeping extremely loose monetary policy: “My worry is very much that if you try to, in a way, get greedy and say, ‘Let’s see how low this will go,’ you set in motion a process that causes the economy to go in reverse,” he said. “There are risks to pushing things too far.”
Kansas City Federal Reserve president Esther George is a voting member on the FOMC this year, and is the most hawkish member on the panel. While no firebrand like Lacker, her opposition to ultra-loose policy and quantitative easing is a matter of record. One of the three dissenters in favor of a rate hike in last month’s FOMC meeting, George told CNBC that she thought even an interest rate of 1% was an accommodating stance. George’s main concern has long been inflated real estate prices, especially in her region.
The third dissenter at the September FOMC meeting was Boston Federal Reserve President Eric Rosengren. Considered a dedicated dove, Rosengren’s call for an interest rate hike caught market-watchers by surprise. Rosengren called for “modest, gradual tightening now,” saying that the Fed’s current policy risks shortening the recovery, instead of prolonging it. This is a major about-face for Rosengren, and substantially increases the odds of a rate hike before Christmas.
The “Knights of November” still have their work cut out for them, especially since there is no post-meeting press conference by Fed Chair Janet Yellen scheduled for November. Raising rates then would come to a great shock to markets, which will already be jittery over the impending Presidential election.
A more reasonable plan, though still not guaranteed, would be a December rate hike. St. Louis Federal Reserve president James Bullard might be enticed to vote “aye” in December, judging by his recent remarks.
While the CME Group FedWatch tool is giving a 63% chance of a December rate hike, it is predicting only a 13% chance of a move in November.
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