Fed Members Leaning Away From Interest Rate Increases

Summary

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WSJ Your Money Briefing

Episode: Fed Members Leaning Away From Interest Rate Increases
Host: J.R. Whalen
Guest: Michael Derby (WSJ reporter)
Date: January 10, 2019

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Episode Overview

This episode explores the shifting outlook among Federal Reserve policymakers regarding interest rate increases in 2019, featuring insights from FOMC member James Bullard, as reported by WSJ’s Michael Derby. The discussion highlights why Wall Street is reacting positively to more dovish signals, the increasing alignment of Fed members toward patience with rate hikes, and Bullard's unique take on the reliability of market-based indicators versus Fed forecasts.

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Key Discussion Points & Insights

1. Background: Fed’s Rate Hike Expectations

• Market Volatility and Economic Uncertainty:
  • As recently as November 2018, the Fed was expected to raise rates four times in 2019; by January, this expectation shifted to two hikes due to downturns in markets and mixed economic signals.
  • “As recently as November, the Federal Reserve was expected to raise interest rates as many as four times this year... that's been dialed back to two. But is two too many?” (J.R. Whalen, 03:04)

2. James Bullard's Dovish Stance

• Longstanding Opposition to Rate Hikes:

  • James Bullard, St. Louis Fed President and FOMC voting member, has for years argued against further interest rate rises, citing weak inflationary pressures.
  • “Mr. Bullard has long...been arguing against interest rate rises, believing that if there's not that much inflation pressure in the economy...there hasn't really been any justification for raising rates.” (Michael Derby, 03:14)

• Recession Concerns:

  • Bullard fears further hikes could tip the US economy into recession, though he doesn’t specify the exact tipping point.

3. Momentum Shifting Across the Fed

• Other Fed Officials Now Urging Patience:

  • Previously hawkish members like Boston’s Eric Rosengren and Chicago’s Charles Evans are now leaning toward holding off on rate increases as well.
  • “He [Rosengren] backed off and said, we have time to be patient and take stock before we do anything else.” (Michael Derby, 04:25)
  • “We have nothing that is pushing us to do anything right now.” (Chicago Fed President Charles Evans, paraphrased by Michael Derby, 04:58)

• Wall Street’s Reaction:

  • Greater patience from Fed members is generally viewed as a positive on Wall Street, reducing the risk of monetary over-tightening that could hurt markets.

4. Market vs. Fed Economic Forecasts

• Bullard’s Reliance on Market-Based Indicators:

  • Bullard places significant trust in market signals for future inflation and economic expectations, often finding them more accurate than the Fed’s projections.
  • “Mr. Bullard has consistently placed a lot of emphasis on market based indicators of the economy...over the last good number of years, it's the market's view on what monetary policy will do that is actually proven to be more accurate.” (Michael Derby, 05:36)

• Markets Predicting No Rate Hikes:

  • At the time, markets anticipated no additional rate hikes or even a cut, reflecting skepticism about the Fed’s more optimistic forecasts.

5. The Dynamic of Decision-Making Within the Fed

• Voting and Influence:

  • All FOMC members participate in policy discussions, but voting members—from rotating regional Fed presidents—have outsized influence.
  • “Whether or not you have a vote, you still get to make your piece and say what you want...but the voting role does sort of shine a spotlight on the people that have it.” (Michael Derby, 07:05)

• Consensus Matters:

  • Consensus is important for Fed decision-making, so a collective “tilt” in sentiment can sway policies even before formal votes occur.

6. Fed Balance Sheet Policy

• Bullard’s Perspective on Balance Sheet Reduction:
  • Bullard prefers a more flexible approach to reducing the Fed’s balance sheet, though he has lost that internal debate. For now, he accepts “autopilot” runoff, aligning with most colleagues.
  • “He never wanted the Fed to be doing what it's doing right now with the sort of automatic roll off of its balance sheet...But he acknowledges he didn't win that debate.” (Michael Derby, 08:18)

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Notable Quotes & Memorable Moments

• Bullard’s Market Deference:

  • “Over the last good number of years, it's the market's view on what monetary policy will do that is actually proven to be more accurate.” (Michael Derby, 05:36)

• Shift in Fed Sentiment:

  • “We've got a while to take stock of things, see if the market view's right, see if...maybe it's time to be patient.” (Michael Derby, 03:58)
  • “We have nothing that is pushing us to do anything right now. So let's just be patient and take stock before we decide whether or not we need to raise rates again.” (Michael Derby, 04:56)

• On Fed Consensus:

  • “When you see all the voters tilting in a certain way, it does help add a little extra emphasis on the idea that that might actually be the way that the Fed goes.” (Michael Derby, 08:06)

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Timestamps for Key Segments

• 03:14 – Bullard explains his opposition to further rate hikes & risks of recession
• 03:58 – Emergence of broader Fed caution and calls for patience
• 04:50 – Positive reaction on Wall Street to dovish Fed signals
• 05:33 – Bullard’s view: Markets better at predicting economic outcomes than the Fed
• 07:05 – Dynamics of voting and influence in Fed policymaking
• 08:17 – Bullard’s thoughts on the Fed’s balance sheet reduction approach

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Summary Takeaways

• Dovish Shift at the Fed: Several key members, including previously hawkish ones, are now more cautious about raising rates, mirroring Bullard’s fiscal conservatism.
• Market Signals Favored: Bullard emphasizes market expectations over central bank forecasts for predicting economic direction.
• Consensus-Building is Key: Shifts among voting FOMC members may signal the Fed’s next move, as consensus within the committee is particularly valued.
• Complex Policy Backdrop: While there are differing views on technical policies like balance sheet reduction, the committee largely seeks to avoid adding complexity in uncertain times.

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Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. A Journal reporter who covers the Federal Reserve got a one on one interview with FOMC member James Bullard. You'll hear why Wall street likes what Bullard had to say. That's next. First, these money and market stories you should know. The Wall Street Journal Real Estate Bureau reports on two townhouses in New York City's Harlem neighborhood and asking a record $27 million, the two homes, which are 9,000 square feet each, could be combined into one mega mansion. The two houses were formerly members of the Dwight Mansion, named for John Dwight, the founder of the company that created Arm and Hammer baking Soda. The Journal also reports on the growing conflict over college debt intensifying among American families. Tuition increases have outpaced household incomes just as parents are facing myriad financial obligations, including supporting their own parents and saving for retirement, health care costs and sometimes their adult children's living expenses. A recent Sallie Mae survey says that parents currently saving for their children's college believe they'll be able to cover 37% of the cost from savings. But parents who are paying for children already in college actually cover just 10% from savings. And while there's plenty of reporting on college loan programs and grants for low income students, oftentimes forgotten is the number of college students who struggle to buy food. A study by the Government Accountability Office says that about 2 million students on college campuses may be going hungry and do not have access to or are not familiar with resources like food stamps. And that could be forcing them to leave college without graduating. The first ever study of its kind says more than half of college students who list risk factors for what is known as food insecurity did not participate in assistance programs. And as Of September of 2018, more than 600 colleges have or plan to launch food pantries for students. As recently as November, the Federal Reserve was expected to raise interest rates as many as four times this year. But in light of stock market volatility and wavering economic indicators, that's been dialed back to two. But is two too many. It is in the eyes of at least one voter on the Federal Open Market Committee. And Wall Street Journal reporter Michael Derby is on the line with us with details. So, Michael, you spoke with James Bullard. He's the chairman of the St. Louis Fed. He has a voting roll on the FOMC, and he feels in terms of interest rates, the status quo so far is just fine.

[Michael Derby]

Yeah. Mr. Bullard has long actually, for several years, been arguing against interest rate rises, believing that if there's not that much inflation pressure in the economy, and basically the overall inflation gauges show it's been at best at the Fed's 2% target, but mostly below it, there's basically, he hasn't really seen any justification for raising rates. And so what's happened is what he fears now is if the Fed does go forward with more interest rate rises, he's worried that that might actually be the thing, that he doesn't specify how many rate rises it would need to be, but he's worried that continuing to do interest rate increases could actually send the economy into recession. And what's been interesting about where Mr. Bullard is. Cause, you know, as I just suggested, he's been opposed to these rate rises for a long time. Over the last few days, a number of Fed officials have shifted in his direction. And that caution that you, you know, that. That uncertainty about the outlook you alluded to in your opening, that's caused a whole bunch of Fed officials to also go and say, like, hey, maybe it's time to be patient. You know, we have. The collective assessment is for two rate rises this year. But now you see Fed officials saying, we've got a while to take stock of things, see if the market view's right, see if our. So another Fed official who had been actually fairly hawkish, Boston Fed leader Eric Rosengren for quite some time, he talked about how he wanted more interest rate rises than all of his colleagues. Even today in his speech today, he backed off and said, we have time to be patient and take stock before we do anything else.

[J.R. Whalen]

Well, if you're on Wall street or an investor, the cautious track, at least in the eyes of two of the FOMC members, the cautious track they'd like to see the Fed take going forward. Well, that's got to be good news.

[Michael Derby]

Yeah. And there's even another Fed official, the Chicago Fed President, Charles Evans, who's also getting a voting role in the FOMC this year. Like Mr. Rosengren, Mr. Evans has been pretty hawkish for quite a while about monetary policy, and he also reiterated the message that we have nothing that is pushing us to do anything right now. So let's just be patient and take stock before we decide whether or not we need to raise rates again. You know, bottom line for Mr. Rosengren and for Mr. Evans, they still remain fairly optimistic about the outlook and they still do think at some, they do seem to lean, that the Fed's going to be able to do it.

[J.R. Whalen]

There's a very interesting note in your story from your interview with Bullard, and that is he feels the market has been more accurate in predicting the track of the economy than the Fed.

[Michael Derby]

Mr. Bullard has consistently placed a lot of emphasis on market based indicators of the economy. You know, when he's trying to look forward and figure out what the economy's gonna do, there's all sorts of different ways you can do that. You can look at surveys that economists have made, all sorts of things like that. Well, what Mr. Buller likes to do is look at what markets are pricing for in the future. When he tries to get a sense of whether or not people think inflation is going to go up or down, he looks to inflation expectations data from the markets. And so he's pointed out that we've had a lot of points over the last few years where markets and the Fed have had pretty divergent outlooks for the future. And eventually those things have to reconcile. But he's saying that over time, over the last good number of years, it's the Fed view, I'm sorry, it's the market's view on what monetary policy will do that is actually proven to be more accurate. And right now we have financial markets that expect no rate rises. And even at various points, they've even priced in Fed rate cuts somewhere out in the later year. And Jim, sorry, Mr. Bullard would like his colleagues to pay more attention to what the market is telling them.

[J.R. Whalen]

And the FOMC members, of course, have a vote. And we see the vote count when the Fed announces interest rate moves. But. But what is the relationship between the FOMC members and the Fed chairman, in this case, Jerome Powell, in terms of the sway that they have short of a vote, their sentiment. Does that typically have a lot of sway within the Fed offices?

[Michael Derby]

Well, as we always know, when we take stock of this, all Fed officials contribute in FOMC deliberations. So whether or not you have a vote, you still get to make your piece and say what you want to say about what you think monetary policy should do. But the voting roll does sort of shine a spotlight on the people that have it. So when every year when the new, you know, it's a, it's a complicated dynamic that determines who gets a vote. But when the new class of voters rotates in, it just shines a spotlight on those people's views. And you know, and it does. It's another thing for the chairman to manage as the chairman is trying to, you know, forge a consensus about monetary policy. And at the Fed in particular, having a consensus view on changing monetary policy based on a broad consensus is important. So there have been times when we've seen lots of dissents, especially during the financial crisis. But that's a pretty rare thing to see at the Fed. So when you see all the voters tilting in a certain way, it does help add a little extra emphasis on the idea that that might actually be the way that the Fed goes.

[J.R. Whalen]

And then aside from interest rates, Bullard said the Fed should maintain its balance sheet reduction plan.

[Michael Derby]

He also made the point, and I didn't put it in the story just because there's only so much you can put in the story, that he never wanted the Fed to be doing what it's doing right now with the sort of automatic roll off of its balance sheet. He actually always preferred a more dynamic thing where the Fed would change the pace of runoff, much like it changes short term interest rates. But he acknowledges he didn't win that debate for now. He thinks that just keeping things on autopilot, it's what people expect, it's not an issue. So he'd like to, from what I've seen, almost all of his colleagues right now would like to keep the balance sheet runoff on autopilot. I suppose it's an effort not to add an additional complication to an already pretty complex landscape that is Wall Street

[J.R. Whalen]

Journal reporter Michael Derby. You can read all about his interview with James Bullard in his story on WSJ.com or the WSJ app. Michael, thanks for being with us.

[Michael Derby]

Thank you for having me. I appreciate it.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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