Fed Officials’ Comments Suggest No Rate Hike Next Week

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: