Talking Points:
- Fed’s Harker, Kocherlakota, and Bullard offered remarks
- Commentary continues to signal a December rate hike
- US Dollar rallies alongside 2-year government bond yields
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Three Federal Reserve members took the stage on Friday with remarks on monetary policy and economic forecast. The first to speak was new Philadelphia Fed President Patrick Harker. He said that he would prefer the central bank to raise rates sooner rather than later with the Fed risking credibility should the liftoff be delayed. Repeating a popular sentiment, he suggested an earlier start means the Federal Reserve can tighten policy gradually. Going forward, he expects steady and modest US growth. Mr. Harker will not be a FOMC voter until 2017.
Up next was Minneapolis Fed President Narayana Kocherlakota. One of the more dovish members – and set to retire as of the end of this year – he said that the central bank should respond more to output and inflation gaps. Kocherlakota was adamant that the Federal Reserve should focus more on achieving its twin goals, otherwise known as the dual-mandate. He added that the Fed adhering to the Taylor rule slowed job creation and required the central bank to seek a slow recovery.
Last to speak was St. Louis Fed President James Bullard. He repeated that US labor markets are close to normal and that he favors beginning Fed policy normalization. Inflation net of the current oil-price shock is reasonably near 2 percent. Prudent policy suggests edging the policy rate and balance sheet toward more normal levels. Interestingly, Mr. Bullard said that maintaining a zero interest rate policy across the G-7 may lead to lower rates and inflation over time. This contrasts his prior view that a zero interest rate policy puts upward pressure on inflation. James Bullard will be a voting FOMC member next year.
The Dow Jones US Dollar Index climbed after Harker’s hawkish commentary. At the same time, US front-end government bond yields rallied. This suggests Fed rate hike expectations firmed amongst market participants. Fed Funds Futures are pricing in a 79 percent probability of a 0.25 percent increase in the effective rate at the December 16th monetary policy announcement.
