Not all the FOMC members’ speeches are interesting. The first ones in 2016 were mostly self-congratulation for the liftoff. The speeches of Eric Rosengren and James Bullard (both voters in 2016) during the week of 11-15 January were clearly different.
Eric Rosengren (“Early observations on Gradual Monetary Policy Normalization”, 13 January)
- He said he is worried by the stock markets, the decline of oil and commodity prices, global growth and Q4 US growth figures.
- He also said that the policy makers “should not overreact to short-term” but that they “should take seriously the potential downside risks to their economic forecasts and manage those risks” when thinking “about the appropriate path for monetary policy”
- Interestingly, he insisted on the fact that many dots are below or above the median dots. “While the median forecast provides a reasonable estimate of the likely path of the federal funds rate, my own view is that such a forecast does have downside risks. These downside risks reflect continued headwinds from weakness within countries that represent many of our major trading partners, and only limited data to support the projected path of inflation to target seen in the SEP, at least to date. Further tightening will require data continuing to be strong enough that growth will be at or above potential, so that Federal Reserve policymakers can be confident that inflation will reach our 2 percent target.”
James Bullard (“Oil prices, inflation and US monetary policy”, 14 January)
- He said that he is concerned by the collapse of oil prices, even if he says that “low oil prices remain a net positive for the US economy” (i.e. for growth).
- He maintained the argument that the impact of lower oil prices on inflation is transitory but he indicates that if oil prices stabilize at 20 $/barrel, inflation will take far more time to return to 2% and this will continue to weigh seriously on inflation expectations. The impact of lower inflation expectations is “becoming worrisome” for him as the drop of inflation expectations may in itself complicate the gradual rise of inflation.
We know that Eric Rosengren is one of the most dovish FOMC member (with Charles Evans) but this is interesting to see that his argumentation has changed these last few weeks. That’s probably more interesting to see that the collapse of oil prices made become James Bullard far less hawkish than he was in 2015. Survey-based measures of inflation expectations are not collapsing but they have been declining continuously (see below the NY Fed consumers inflation survey), while market-based measures are already very low. This will probably prompt the FOMC to be very cautious in 2016 and the markets events of the beginning of the year reduced the probability of a fed funds hike in March.