Federal Reserve building in Washington. (Photo: AP)

Financial markets waiting on next week’s Federal Reserve meeting got a taste of what’s on policymakers’ minds from a trio of speeches Monday by Fed officials, and they all pointed to no change in rates, unlike Friday’s comments from Boston Fed President Eric Rosengren.

Rosengren had said continued low rates increase the chances “of overheating the economy” and shortening “the duration of the recovery,” which helped drive an almost 400-point drop in the Dow, its biggest decline since the Brexit vote in late June.

But by Monday morning stocks were recovering moderately, supported by comments from Atlanta Fed President Dennis Lockhart and Minneapolis Fed President Neel Kashkari.

In his speech to the National Association of Business Economists, Lockhart repeated his appeal for a “serious discussion” about raising rates, but noted that there was no “urgency” to act, although he expected “a lively discussion next week.”

On CNBC Kashkari also said there was no urgency for the Fed to raise rates. “Let’s get as much data as we can and let’s try to get our inflation back up,” said Kashkari, noting that inflation is low throughout the globe.

But then stocks took off, with the Dow up 200 points, after Fed Governor Lael Brainard, in a speech to the Chicago Council on Global Affairs, recommended “prudence in the removal of [Fed] policy accommodation.”

Rosengren and Brainard are voting members of the FOMC; Kashkari is an alternate, but even current non-voting members participate in FOMC discussions. Fed policymakers hold a two-day meeting on Sept. 20 and 21.

In his note about today’s comments from Fed officials, Jim O’Sullivan, chief U.S. economist at High Frequency Economics, wrote that while Brainard “could merely be making the case for tightening slowing, rather than not at all, our interpretation is she favors staying on hold at next week’s meeting.” And although he said Lockhart appeared open to a rate hike next week, the “base case remains for no change in rates until December.”

O’Sullivan continued, “Officials will probably use next week’s meeting to encourage expectations for tightening before year-end, but no more than that.”

Brainard’s speech was the most dovish among Monday’s comments from Fed officials. Her recommendation for “prudence” was based on five reasons:

• Continued low inflation, undershooting the Fed’s 2% target.

• A flattening Phillips Curve, which traditionally would be steepening as wages rise and unemployment falls.

• Disinflation and weak demand from abroad, which will “likely weigh on the U.S. outlook for some time,” as well as fragile global market, which could also pose risks for the U.S.

• An unusually low “neutral rate of interest.” Despite a Fed Funds rate near zero—the current range is 0.25-% to 0.50%—GDP growth has averaged “a very modest” 2% rate and inflation has averaged only 1.5%.

• Asymmetric Fed policy options. With rates near zero, the Fed is less able to respond to downside shock to aggregate demand as upside shocks.

“Brainard is a dye-in-the-feathers dove, but there was speculation that she would will play the role of a Trojan Horse and signal that the FOMC intends to raise rates on Sept. 21,” said Ward McCarthy, chief financial economist at Jefferies & Co. “Rather, she indicated that the case for tightening preemptively is less compelling and favors a policy that tilts toward guarding against the downside.”

McCarthy added, “The Fed does want to resume the normalization process in the not-too-distant future, but a rate hike on Sept. 21 is unlikely.”

Nicholas Colas, chief market strategist at Convergex, agrees. “I expect that the Fed will not raise rates in September, but will increase by a quarter point in December.”

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