The Fed in Unison: Bostic, Bullard, Evans, and Rosengren advise rate caution, Dollar falls

Four current Fed Presidents have advised moderation and caution in the central bank’s rate policy this year.

In an unusual run of commentary and opinion Raphael Bostic of the Atlanta Fed, Charles Evans of Chicago, James Bullard of St. Louis and Eric Rosengren of Boston warned against assuming the economy warrants further rate increases.

Atlanta Fed President Raphael Bostic speaking in Chattanooga, Tennessee on Wednesday said that he thinks rates are about where they need to be. “A patient approach to monetary policy adjustments in the coming year is fully warranted in light of the uncertainties about the state of the economy and about what level of policy rates is consistent with a neutral stance.”

Mr. Bostic’s prepared remarks hit the market early in the New York session driving the euro about 60 points higher against the dollar and dropping the US currency 70 points versus the yen.  Both currency pairs haveretained their new levels.

Mr. Bostic does not vote this year in the FOMC rotation. In 2018 he supported the tightening policy and was part of the unanimous approval of the December 0.25% increase.

Monetary policy “has likely come close to achieving a neutral policy stance—one that is neither providing accommodation nor is being restrictive and attempting to actively slow the economy,” he said.  He sees ‘little need to…push the federal funds rate above the neutral stance.”

Mr. Bostic expects economic growth to moderate in 2018 as the stimulus from the 2017 tax bill begins to fade and that inflation will be near 2%. He also warned about the specific risk to consumers from a broadening US-China trade dispute. He sees firms exercising caution in their expansion plans in light of economic uncertainties.  

James Bullard, the leader of the St. Louis Fed and a long-time opponent of the bank’s rate normalization policy said in a Wall Street Journal interview on Tuesday, “We’ve got a good level of the policy rate today,"  there isn’t any pressing need to go higher.

Mr. Bullard who will be voting in FOMC this year but did not in 2018 said he isn’t expecting the Fed to reduce rates but “I wouldn’t rule that out depending on how the economy develops.” “If the economy slowed down more than we thought, or the inflation outlook deteriorated more than I’m suggesting here, there might be grounds for a little bit lower rate in that scenario.” 

He expects the US economy to grow between 2.25 to 2.5% in 2019 with unemployment remaining about where it is now. 

He also remarked that the market’s view of likely rate policy is a good deal easier that the Fed’s.  “In the last decade, the market has been far more accurate than the committee itself in saying how policy was going to evolve going forward.”

The generic US 10-Year Treasury yield peaked at 3.24% on November 7^th and fell for the next two months closing at 2.56% on January 3rd.  On December 19^th the day the Fed increased the fed funds rate to 2.5%, the 10-Year closed at 2.75% almost 50 points below its peak.

Chart: Reuters

The credit market has accurately anticipated the moderation in Fed policy at the December  meeting and subsequently.  

Eric Rosengren, President of the Boston Fed and a voter this year on the FOMC but not last added his views in a speech to the Boston Economic club, “There should be no particular bias toward raising or lowering rates until the data more clearly indicate the path for domestic and international economic growth." "I believe we can wait for greater clarity before adjusting policy."

Rosengren said he expects consumers to fuel solid growth this year, that financial markets are probably “unduly pessimistic” and he does not expect a recession this year.

And finally Chicago Fed President Charles Evans, another incoming FOMC voter, posited in a speech in Riverwoods, Illinois on Wednesday that since inflation is not a threat the bank can be patient. 

“Because inflation is not showing any meaningful sign of heading above 2 % in a way that would be inconsistent with our symmetric inflation objective, I feel we have good capacity to wait and carefully take stock of the incoming data and other developments,” he said.

“Incoming data on economic activity generally continue to be strong -- witness the December jobs report,” he noted. “Moreover, the most recent reports from my business contacts support these data.”

Mr. Evans view on the neutral rate is a bit more aggressive than his colleagues. “If the downside risks dissipate and the fundamentals continue to be strong, I expect that the fed funds rate will eventually rise a touch above its neutral level,” to 3% to 3.25%. 

All four presidents echo similar comments from Chairman Jerome Powell last week who cited restrained inflation as a reason for the central bank to be patient with rate increases especially in light of the three month slide in equities and the fading prospects for global economic growth.

In December the Fed reduced its fed funds and economic projections for the first time in two years. Its end of year estimate for the base rate dropped to 2.9% from 3.1% in the previous September materials. That 0.2% was the difference between three hikes this year and two above the current 2.5%.  

The bank reduced it GDP projections for 2018 to 3.0% from 3.1% and for next year to 2.3% from 2.5%.

That three incoming voters on the FOMC and one prior supporter of rate hikes are advising caution on rate policy may not bring the market view of 2019 rate hikes to neutral but it does diminish the odds for a first half increase dramatically.

More likely than not the FOMC will wait until mid-year before awakening rate hike prospects again.