A Fed Hawk and Dove -- Implications for March FOMC Meeting?

Two recent speeches by Fed officials -- Cleveland Fed President Mester (hawk) and Fed Governor Brainard (dove) -- underscore the possibility that a downshift in the "dots" will be the most lasing market-relevant outcome of the March 15-16 FOMC Meeting.  While a March Rate Hike still appears to be on the table, market reactions to one could be short-lived as a more benign outlook for the funds rate turns out to the more significant change in Fed policy.

Mester says explicitly that the Summary of Economic Projections (SEP) "will be particularly helpful in March given the global economic and financial developments we've seen since our last set of projections."

And, it would seem that the SEP may be the place where Fed officials display their heightened uncertainty about the outlook.

     a.   Mester says, "Even as policy gradually normalizes, it will likely need to remain accommodative for some time to come, given some of the forces impacting our economy -- for example, slow growth abroad, dollar appreciation, more restrictive financial conditions, and the continued rebalancing of supply and demand in the energy sector."

The SEP also may be the place to reflect an apparent overall agreement by Fed hawks and doves about the possible downshifting of the neutral rate of interest rate -- the rate consistent with trend economic growth at full employment -- relative to past levels.

     a.  In an earlier speech in February, Mester acknowledged "there is some uncertainty about what the "normal" level of interest rates is.  If productivity growth remains low and the potential growth rate of the economy over the longer run has moved lower, then the longer-run level of the funds rate consistent with price stability and maximum employment -- the so-called neutral rate -- would also be lower than it was in earlier periods."  This is the first opening I've seen in Mester's typically hawkish commentary that lends itself to some compromise with the doves on the FOMC.

    b.  Brainard said, "The neutral rate of interest -- or the rate of interest consistent with the economy remaining at its potential rate of output and inflation remaining at target level -- appears to have declined over the past 30 years in the United States and is now at historically low levels."

To be sure,  a March Rate Hike still appears to be on the table, particularly since recent US macroeconomic data support the hawkish position.  

Mester says:

      a.   "At this point, I see the market volatility and sharp drop in oil prices as posing risks to the forecast, but I believe it is premature to conclude they necessitate a material change in my modal economic outlook."

       b.  "While there is a possibility that a steeper, more persistent drop in equity markets could lead to a broader and more persistent pullback in risk-taking and credit extension, with spillovers to the broader economy, so far we have not seen this."

        c.  "Until I see further evidence to the contrary, my current expectation is that the US economy will work through the episode of market turbulence and the soft patch of economic data to regain its footing for moderate growth, even as the energy and manufacturing sectors remain challenged."

Q116 Real GDP Growth so far looks like it sped up to an above-trend 2+% from 1.0% in Q415. 

Meanwhile, Brainard voices concern that "Core PCE Inflation has remained stubbornly in the vicinity of 1-1/4 to 1-1/2 percent over the past three years in the United States."

The y/y for the Core PCE Deflator jumped to 1.7% in January.