Rates 'Liftoff' Getting Closer, Goldman Warns

Recent comments from FOMC participants on the forward guidance and the appropriate timing of the first hike of the fed funds rate suggest, Goldman warns, a greater clustering of FOMC participants' views around a mid-2015 'liftoff' in rates. Similarly, private sector forecasts for the first hike are becoming more centered on mid-2015 rather than August to September.

Via Goldman Sachs,

In today's note, we review recent comments from FOMC participants on the forward guidance and the appropriate timing of the first hike of the funds rate in advance of next week's September meeting.

With respect to the forward guidance, both Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren expressed discomfort with the FOMC's current calendar guidance last week. President Mester expressed concern with the FOMC statement's guidance "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends," which Philadelphia Fed President Charles Plosser dissented against at the July meeting. She argued that the forward guidance should instead be calibrated to distance from the Fed's goals and the speed at which progress is being achieved. President Rosengren likewise argued that as the economy approaches full employment, the Fed should stop providing calendar guidance.

With respect to the appropriate timing of the first hike of the funds rate, recent comments point to a greater clustering of FOMC participants' views around mid-2015. In particular, one or two FOMC participants (namely, Presidents Lockhart and Rosengren) have likely pulled forward their views on the most appropriate date for liftoff; there is nothing to indicate that those previously expecting a mid-2015 hike have moved; and the more hawkish participants have also likely stayed in place. Exhibit 1 lists participants' recent comments that are most relevant to the outlook for the funds rate.

We highlight the views of some participants below:

Atlanta Fed President Dennis Lockhart seems to have pulled forward his view somewhat from the "second half" of 2015 to "mid-2015." While it is possible that he did not intend this change of wording as a deliberate sign of a shift in view, it follows a similar transition made earlier in the year by San Francisco Fed President John Williams.

 

Boston Fed President Eric Rosengren, a likely 2016 dot in June, has consistently maintained the view since April that the first hike should come when the Fed is about one year from achieving its employment and inflation targets. However, the improvement in the data has likely been somewhat faster than he initially expected, and his recent comments suggest he is likely to move forward to 2015.

 

Chicago Fed President Charles Evans identified himself in July as one of the 2016 dots in the June Summary of Economic Projections. He seemed to indicate that he had maintained that view, although this might have changed in the last two months.

 

Presidents Lockhart and Williams have both said that their mid-2015 timing puts them in agreement with Fed Chair Janet Yellen.

 

Among more hawkish participants, President James Bullard prefers March 2015 and President Richard Fisher has mentioned "early next year." While President Charles Plosser has argued that the funds rate should have already increased and President Esther George has expressed at least partial agreement, President Jeffrey Lacker has said he does not think the Fed is "behind the curve."

 

While not indicative of any recent change of view, comments from last week by Governor Jerome Powell and April comments by Governor Daniel Tarullo suggest both might hold somewhat more dovish views than is usually assumed.

 

Governor Lael Brainard will submit projections for the first time, which could slightly reduce the average and median dot if her policy views are similar to those of the leadership.

Similarly, private sector forecasts for the first hike--recorded in a monthly Wall Street Journal poll--became more centered on mid-2015 from August to September, as shown in Exhibit 2.

While strong data likely led some forecasters to shift their expectations to Q1 of 2015 in the August poll, the weaker-than-expected August employment report likely caused a shift back in the September poll.