The Federal Open Market Committee (FOMC) meets again on December 18-19. That will be the last scheduled meeting of the year and it should be a doozy, as capital markets are worked up about the likelihood of another increase in the target range for the fed funds rate and the uncertainty about what the Federal Reserve's interest rate projection for 2019 will look like.
The Federal Reserve is currently projecting three rate hikes in 2019. The fed funds futures market, meanwhile, is projecting only one rate hike in 2019 by the slimmest of margins. To wit, the CME Fed Watch Tool shows just a 50.7% probability of a rate hike at the September 2018 FOMC meeting.
A lot will happen between now and the end of 2019 to influence the interest rate outlook. One thing about to happen is a changeover in the FOMC.
That change matters greatly because the FOMC votes on changes in interest rates and because the stock market is fearful the FOMC might go too far in raising the fed funds rate and trigger a notable economic slowdown, if not an actual recession.
The good news for the stock market perhaps is that the 2019 FOMC will have some doves occupying a seat at the voting table.
A Little Background
When the FOMC is at full capacity, there are twelve voting members: the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents.
The president of the Federal Reserve Bank of New York has a permanent vote on the committee, so the remaining four presidents with a vote rotate annually. They serve one-year terms beginning January 1 each year.
Other Federal Reserve bank presidents attend the FOMC meetings and contribute to the discussions, but they do not cast a vote for setting policy.
The members of the Board of Governors are nominated by the President of the United States and are confirmed by the Senate. Michelle Bowman is the newest Fed governor, having taken office on November 26.
There are two vacancies, then, on the Board of Governors. President Trump has nominated Marvin Goodfriend and Nellie Liang to fill those vacancies. Neither has been confirmed yet by the Senate.
Accordingly, there are only ten voting members on the FOMC at this time.
Whose names will you be hearing a lot throughout 2019? The five governors are Jerome Powell (Chairman), Richard Clarida (Vice Chairman), Lael Brainard, Randal Quarles, and Michelle Bowman.
The December 18-19 FOMC meeting will be the first time Ms. Bowman casts a vote at the FOMC meeting. She holds the governor seat reserved for a community banker, so an assumption will be made that she is apt to have a policy view that is dovish at best and centrist at worst.
Frankly, there isn't a good line on her policy disposition, yet it's fair to assume that she won't want to rock the boat with a dissenting vote at her first meeting.
That was true of Fed Governor Clarida who voted in favor of a rate hike at the September FOMC meeting even though he is generally considered to be somewhat dovish.
By and large, Fed governors typically vote in unison with the Fed Chair, which means the dissension in the ranks usually originates among the voting Federal Reserve Bank presidents.
The names you'll want to be closely acquainted with in that realm include John Williams (New York), Charles Evans (Chicago), Eric Rosengren (Boston), James Bullard (St. Louis), and Esther George (Kansas City).
Mr. Williams recently became head of the Federal Reserve Bank of New York, succeeding William Dudley in that role. Prior to serving in his current post, Mr. Williams was President of the Federal Reserve Bank of San Francisco.
Mr. Williams might be regarded as a hawk because he has been on board with each of the rate hikes this year.
Each FOMC member, including Mr. Williams, would acknowledge that they are data dependent for their interest rate position, yet the market makes a living out of reading between their speech lines when thinking about what the FOMC will do with monetary policy.
Below we feature excerpts from recent speeches/appearances from the incoming FOMC presidents to provide some flavor for their perceived policy tilt. The speeches have been accessed through the St. Louis Federal Reserve's repository of speeches from Federal Reserve members.
- In an October 10 speech entitled, Moving Toward 'Normal' U.S. Monetary Policy :
"In light of the progress we’ve made on our monetary policy goals, the FOMC has been in the process of gradually normalizing monetary policy for the past few years. Looking forward, I continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and achievement of our dual mandate goals... Whatever the future may bring, I will be guided by our dual mandate, a heavy dependence on data, and a steadfast commitment to transparency."
- In an October 12 interview with CNBC:
"I kind of think neutral is in the 2.75-3.00%, so after many, many years of accommodative policy, which I have supported strongly because inflation is now up at 2.00%, it's time to readjust the policy stance at least to neutral. Let's see how the economy is performing at that point and then we might have to do a little bit more after that."
- In an October 1 address to the NABE Annual Meeting entitled, Exploring Current Economic Conditions and the Implications for Monetary Policy:
"My own view is generally consistent with the SEP forecasts. I believe that Federal Reserve policymakers will likely need to move interest rates gradually from a mildly
accommodative stance to a mildly restrictive stance in order to best fulfil [sic] our mandate – stable prices and maximum sustainable growth.
While this amounts to one person’s forecast, it is important to note that it is fully consistent with a forecast of GDP growth above potential that leads to further tightening of labor
markets, and inflation mildly overshooting the Federal Reserve’s 2 percent target. Of course, if some of the risks that I have highlighted today become more germane to the outlook, a different policy path would be warranted."
- In a December 7 speech before the Indiana Bankers Association entitled, More on Modern Monetary Policy Rules:
"...three important macroeconomic developments have altered key elements of policy rule construction. Incorporating these developments yields a modernized policy rule that
suggests the current level of the policy rate is about right over the forecast horizon."
- In an October 11 speech to an Economic Forum in Tulsa entitled, Thoughts on the U.S. Economy, Monetary Policy and Energy Sector Dynamics:
"At last month’s meeting, the Federal Open Market Committee (FOMC) took another step to remove some of the extraordinary monetary accommodation that has been in place since the onset of the financial crisis. This gradual normalization of policy seems appropriate to me given that the FOMC’s employment and inflation objectives have largely been achieved while the current setting of its overnight interest rate target remains below estimates of its longer-run value.... the path of policy cannot be on a pre-set course at this stage of the expansion"
What It All Means
St. Louis Fed President Bullard will carry the mantle of being the biggest dove on the 2019 FOMC. Ms. George, meanwhile, might be labeled its biggest hawk given her prior history as a voting FOMC member.
Assigning these labels is more of an inside baseball thing.
What happens in the actual moment of an FOMC decision is what carries more meaning for the capital markets. There will be plenty of "moments" in 2019, too, which will feature eight scheduled meetings and a press conference conducted by Fed Chair Powell following each meeting.
The Federal Reserve has made efforts of late to drive home the point that its policy is not on a pre-set course, which is another way of saying the market will need to treat every FOMC meeting as a "live" meeting for a possible interest rate move.
The prevailing assumption in the market is that the FOMC will have to adopt a more conservative rate-hike stance than current 2019 projections suggest.
That assumption has been borne out of the stock market sell-off, signs of deepening weakness in the housing market, the persistence of relatively low and stable inflation rates in the U.S. despite a near 50-yr low unemployment rate, the economic slowdown unfolding in China and Europe, the strengthening dollar, the collapse in oil prices, and the specter of protectionist trade actions.
There will be ample handicapping of the FOMC's expected policy moves, which is always the case. There could be some heightened volatility in 2019 around the FOMC meetings, though, because Fed officials have made a point of emphasizing the Federal Reserve's data-dependent nature at this juncture.
There will be heightened volatility, though, because the market has caught a glimpse this year of how rising interest rates can change the economic outlook, earnings growth assumptions, and the complexion of a bull market.
To say the least, a lot will be riding on the decisions made by the 2019 FOMC whose actions -- or lack thereof -- will speak louder than words in moving capital markets.