Several Fed governors spoke this week.President Harker wouldn’t take rate hikes off the table.President Powell agreed. But doves still exist. Fed President Williams, whose comments were based on recent SF Fed research, argued low rates would be with us for some time. Hence, there was little need to raise rates.Fed President Kashkari based his dovishness on a belief that there is still a larger than desired amount of slack in the labor market.
Overall, here are the primary differences between the hawks and doves.
In addition, the minutes contained a very interesting paragraph that explained the Fed’s concerns about downside risk.While it may seem far-fetched to make that argument in the current environment, numerous such risks exist.Â
They also judged that near-term risks to the economic outlook appeared roughly balanced.
On the surface, this statement appears to be at odds with the data. The long leading indicators point to modest growth, as does the combination of leading and coincident numbers.But scratch the surface and downside risks appear.GDP and productivity growth is weak. Even a modest economic challenge (for example, an oil price spike of $20/bbl or a major economic player like the EU disintegrating) could lower GDP to 0%. The U.S.’ interest rate policy compounds this problem.In the event of an adverse event, the Fed’s actions would be more symbolic than meaningful.And a Republican-controlled Congress would be far less likely to pass a Keynesian styled stimulus package.Â
Participants again emphasized their considerable uncertainty about the prospects for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes on economic activity.In discussing the risks to the economic outlook, participants continued to view the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts, although some noted that several potential changes in government policies could pose downside risks.
