Updated: 05-23-2016

Narrow Range of Views on FOMC?
Updated: 20-May-16  03:50PM ET
Analyst: David Kelland

Treasuries took some sharp losses on Tuesday and Wednesday as San Francisco Fed President Williams and Atlanta Fed President Lockhart (both non-voters on the FOMC this year) used their most forceful language to date to jawbone interest rate markets into pricing in significant probabilities for a rate hike in June or July. The FOMC minutes from the April meeting were released on Wednesday and bond traders raced to their sell buttons as the committee appeared to be intent on a rate hike in June or July if the economy grows as expected.

Some commentators have noted that the minutes referred to 'most participants' who judged that 'it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June" rather than 'most members.' The FOMC members (voters) are notably more dovish than the whole FOMC because the regional Fed presidents have taken a decidedly hawkish tack since the beginning of 2016. Even formerly very dovish Fed Presidents Evans and Rosengren are now talking about 2-3 rate hikes in 2016.

What struck me about the communication from Lockhart on Tuesday and then New York Fed President Dudley on Thursday was that they said that the range of views on the FOMC was relatively narrow. Professing to speak for other members of the committee is not something to be done lightly and infrequent remarks on monetary policy from Fed Governors Powell, Tarullo, and Brainard make their opinions something of a wildcard and fertile ground for speculation. We do know from communication in late 2015 that Brainard and Tarullo may be on the dovish wing of the committee. In public remarks, they questioned the reliability of the Phillips curve (which describes the inverse relationship between unemployment and inflation) and indicated that hard data on inflation would be a better way to calibrate monetary policy. To the extent that Lockhart and Dudley spoke for the Fed Governors, the remarks of those two Fed presidents could be construed quite hawkishly.

The economic data out over the last calendar week showed better-than-expected retail sales, housing starts, and industrial production in April. The positive data surprises have pushed the NY Fed's U.S. GDP growth tracker to show a 1.7% annual rate for Q2, up from 1.2% on May 13. While both the Department of Labor and ADP showed smaller payroll growth in April, the pace of job growth that will push down the unemployment rate over time (remove slack in the job market and eventually contribute to wage growth). Initial jobless claims fell back to 278K last week, down from the more worrisome prior reading of 294K. 

Some FOMC members have noted that there could easily be residual seasonal weakness to first quarter growth numbers. Said another way, the seasonal adjustments do not fully capture the weakness in first quarter growth that has repeated itself throughout the recovery. It is therefore possible that the first quarter soft patch was not as soft as the data indicate. The second revision to Q1 GDP growth (initial estimate of 0.5%) will be out next Friday.

As noted in the U.S. Existing Home Sales report released this morning, low inventory is keeping housing prices high and preventing first-time buyers from buying as many homes that demographics suggest they otherwise would. Mortgage rates are near historic lows and that is actually reducing the tax advantage of home-buying relative to renting. More construction of homes would help ease supply constraints and that appears to be gathering pace in cities, although mostly in the luxury category, according to Marketwatch. Boston Fed President Rosengren (FOMC voter) has cited concerns about froth in the commercial real estate market twice since last fall, most recently on May 12. New home sales data for June will be released on Tuesday. Sales of new homes are accompanied by more collateral spending than those of existing homes as people buy more new appliances and furniture in the former case.

The most obvious risk to the global economy comes from China's credit-intensive growth. The piper will eventually need to be paid through a prolonged period of slower growth or an actual financial crisis, but the timing of that comeuppance is not at all clear. 

- David Kelland, Briefing.com

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