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Fed-Speak Continues to Pave Way for Rate Hike, Yellen Coming Up

Fed-Speak Continues to Pave Way for Rate Hike, Yellen Coming Up

Daniel Dubrovsky, Analyst

Talking Points

  • Patrick Harker and Robert Kaplan presented speeches
  • Both members see the Fed normalizing in the near future
  • Fed’s Chair Janet Yellen is due to present on Friday

Having trouble trading the FX market? This may be why.

Patrick Harker and Robert Kaplan – presidents of the Philadelphia and Dallas Fed branches – presented speeches offering more clues that the central bank may act on monetary policy in the near-term. Up first was Patrick Harker, who already talked about the potential of 2 to 3 rate hikes in 2016 on Monday. After repeating that comment today, he added that it is time to normalize Fed policy as the economy expands and inflation rises. Harker was also adamant that the US presidential election is not relevant for setting monetary policy.

Additional comments from Patrick Harker:

  • Repeats that 2-3 rate hikes are possible this year
  • Global events are important but they do not drive my final decision
  • Things seem stable in China, I do not see it as a significant risk
  • Student loans have become a significant issue

Following Harker, Robert Kaplan added that the Fed ought to act in the near future in order to remove accommodation. Kaplan said that the path for policy normalization will be slow and gradual. Interestingly, unlike Fed’s James Bullard or Patrick Harker, Robert Kaplan said that the “Brexit” vote is indeed a factor for the central bank to consider at its June meeting. He sees 2 percent GDP growth in 2016 and the unemployment rate falling below 5 percent as the country moves towards full employment.

Additional comments from Robert Kaplan:

  • High debt-to-gdp levels are a headwind
  • Aware that global events can hit financial conditions
  • Businesses lack pricing power
  • We are suffocating our small bank community with rules
  • Free trade creates local dislocations but it is good for the U.S.
  • Cyber security threat is major focus for the Fed system
  • Do not overact or over-read market pricing on Fed policy

Last week the FOMC released April’s meeting minutes in which they stated the likelihood for an interest rate hike in June. As it stands, Fed Funds futures are pricing in a 34% chance that the central bank will increase the main lending rate in June. Currency Strategist Ilya Spivak mentioned that as the markets pay closer attention to Fed members, their statements are more likely to inspire financial market volatility. With that in mind, Chair Janet Yellen will be presenting a speech on Friday, her first commentary since the meeting minutes.

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