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The Bond Column

Narrow Range of Views on FOMC?
Updated: 2016-05-23, 08:55:33 ET
Analyst: David Kelland

Treasuries took some sharplosses on Tuesday and Wednesday as San Francisco Fed President Williams andAtlanta Fed President Lockhart (both non-voters on the FOMC this year) usedtheir most forceful language to date to jawbone interest rate markets into pricingin significant probabilities for a rate hike in June or July. The FOMC minutesfrom the April meeting were released on Wednesday and bond traders raced totheir sell buttons as the committee appeared to be intent on a rate hike inJune or July if the economy grows as expected.

Some commentators havenoted that the minutes referred to 'most participants' who judged that 'it likely would be appropriate for the Committee toincrease the target range for the federal funds rate in June" rather than 'most members.' The FOMC members (voters) are notably more dovishthan the whole FOMC because the regional Fed presidents have taken a decidedlyhawkish tack since the beginning of 2016. Even formerly very dovish FedPresidents Evans and Rosengren are now talking about 2-3 rate hikes in 2016.

What struck me about the communication from Lockhart on Tuesday and thenNew York Fed President Dudley on Thursday was that they said that the range ofviews on the FOMC was relatively narrow. Professing to speak for other membersof the committee is not something to be done lightly and infrequent remarks onmonetary policy from Fed Governors Powell, Tarullo, and Brainard make theiropinions something of a wildcard and fertile ground for speculation. We do know from communication in late 2015that Brainard and Tarullo may be on the dovish wing of the committee. Inpublic remarks, they questioned the reliability of the Phillips curve (whichdescribes the inverse relationship between unemployment and inflation) and indicatedthat hard data on inflation would be a better way to calibrate monetary policy.To the extent that Lockhart and Dudley spoke for the Fed Governors, the remarksof those two Fed presidents could be construed quite hawkishly.

The economic data out overthe last calendar week showed better-than-expected retail sales, housingstarts, and industrial production in April. The positive data surprises havepushed the NY Fed's U.S. GDP growth tracker to show a 1.7% annual rate for Q2,up from 1.2% on May 13. While both the Department of Labor and ADP showedsmaller payroll growth in April, the pace of job growth that will push down theunemployment rate over time (remove slack in the job market and eventuallycontribute to wage growth). Initial jobless claims fell back to 278K last week, down from the more worrisome prior reading of 294K. 

Some FOMC members have noted that there couldeasily be residual seasonal weakness to first quarter growth numbers. Said anotherway, the seasonal adjustments do not fully capture the weakness in firstquarter growth that has repeated itself throughout the recovery. It is thereforepossible that the first quarter soft patch was not as soft as the dataindicate. The second revision to Q1 GDP growth (initial estimate of 0.5%) willbe out next Friday.

As noted in the U.S.Existing Home Sales report released this morning, low inventory is keepinghousing prices high and preventing first-time buyers from buying as many homes that demographics suggest they otherwise would. Mortgage rates are nearhistoric lows and that is actually reducing the tax advantage of home-buying relative to renting. More construction of homes wouldhelp ease supply constraints and that appears to be gathering pace in cities,although mostly in the luxury category,according to Marketwatch. Boston Fed President Rosengren (FOMC voter) has citedconcerns about froth in the commercial real estate market twice since lastfall, most recently on May 12. New home sales data forJune will be released on Tuesday. Sales of new homes are accompanied by morecollateral spending than those of existing homes as people buy more new appliances and furniture in the former case.

The most obvious risk tothe global economy comes from China's credit-intensive growth. The piper willeventually need to be paid through a prolonged period of slower growth or anactual financial crisis, but the timing of that comeuppance is not at all clear. 

- David Kelland,