24/7 Wall St. recently showed how Credit Suisse had capitulated that the Federal Reserve and Chair Janet Yellen were on track to hike rates as soon as the March Federal Open Market Committee (FOMC) meeting. If you read into the actual words straight from the mouth of Yellen, maybe a rate hike looks even more in the bag.
One thing that needs to be considered is the title of her speech: From Adding Accommodation to Scaling It Back.
The breakdown of the speech was as follows:
- Assessing the Degree of Monetary Policy Accommodation
- Post-Crisis Period: Same Strategy, New Tactics
- 2014: A Turning Point for Monetary Policy
- Uneven Progress in 2015 and into 2016
- Reassessing Longer-Run Conditions
- Further Progress since Mid-2016
- Monetary Policy Is Not a Panacea
The Fed’s assessments of the “neutral rate” have significantly shifted down over the past few years. In December, most FOMC participants assessed the longer-run value of the neutral real federal funds rate to be in the vicinity of 1% (versus a 0.50% to 0.75% range today).
Yellen sees current labor market conditions now in the vicinity of the Fed’s maximum employment objective. And she noted that the FOMC considers it appropriate to move toward a neutral policy stance. Yellen also addressed the longer-run view versus the short term view:
My colleagues and I generally anticipate that the neutral real federal funds rate will rise to its longer-run level over the next few years. This expectation partly underlies our view that gradual increases in the federal funds rate will likely be appropriate in the months and years ahead: Those increases would keep the economy from significantly overheating, thereby sustaining the expansion and maintaining price stability.
Despite a slow actual rate hike path so far, Yellen referred to 2014 as the year she sees as a turning point. This was when the FOMC began to transition from providing increasing amounts of accommodation to gradually scaling it back. Then Yellen pretty much went after lower “accommodation” right off the bat in her introduction:
Looking ahead, we continue to expect the evolution of the economy to warrant further gradual increases in the target range for the federal funds rate. However, given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.
In the conclusion statements, these words from Yellen would lead the rate-hike-now crowd into thinking a hike is certain in March or very shortly thereafter:
The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective. This outcome suggests that our goal-focused, outlook-dependent approach to scaling back accommodation over the past couple of years has served the U.S. economy well… we realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession. Having said that, I currently see no evidence that the Federal Reserve has fallen behind the curve, and I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate. However, as I have noted, unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.
What is amazing is how much times have changed. The markets used to be spooked endlessly by the end of accommodative policies, at least until later on in 2016. Then came the calls, urges and even demands to start raising interest rates. Now a pro-growth and pro-business environment is being rekindled that has helped the stock market reach new high after new high. It begs the question: Within reason, do rate hikes even matter?
It sure sounds like a rate hike is coming in about two weeks. Stay tuned.