The Dissenters Speak Up
- Over Friday and the weekend Fed officials, the 3 hawkish dissenters among them, opened an initial round of Fedspeak following the meeting.
- Logan and Hammack see inflation that is too sticky high without an “appropriately restrictive” stance of policy (Hammack) that seeks “to better balance” between the Fed’s dual mandate goals (Logan).
- Kashkari’s dissent seemed to stem more from a view of risk managing while leaning about the impacts of the supply and demand shocks hitting the US economy at the moment and the risk that waiting too long means raises the odds of having to become more restrictive later (Musalem echoed these views).
- Among those who have not express an explicit preference for hikes there is an acknowledgement that if inflation comes in hotter than expected it will be appropriate to do so. The June Minutes’ conditional guidance (disinflation soon or shifting hawkish) remains intact.
- The momentum in the data and policy direction seems to clearly favor the hawks.
Since the end of the Fed’s blackout period, we’ve heard a bevy of Fedspeak. There was little on the calendar in advance so much these communications have been proactive as officials seek to provide the market guidance about baseline Fed views and the reaction function.
The three hawkish dissenters from the July meeting each issued statements explaining their dissents. The common thread across the three is a view that inflationary dynamics are running too hot and require a Fed policy response; there is some nuance across them though. Hammack and Logan each seem to be primarily motivated by a view that underlying inflation is simply too high. Hammack’s statement was clear enough, “I am not confident it will return to our objective on its own. Supply-side factors, including energy prices, have boosted inflation this year, but I see inflationary pressures coming from the demand side of the economy, as well.” Logan struck a similar tone, “even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2’s, not all the way to 2 percent, and the risks are to the upside.”
The hawkish case is quite simple in Logan’s view, an economic diagnosis I agree with, that “labor, consumption and financial market conditions indicate that monetary policy is not restraining the economy. Without any policy restraint, inflation will likely continue to trend above target until there’s an unanticipated shock. The FOMC cannot count on unanticipated shocks to achieve its goals and can always adjust policy if unanticipated shocks occur.”
Kashkari seemed a bit less focused on the baseline but rather saw a risk management case between the two sides of the mandate as favoring tighter policy, noting that it seems best to “manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally as we gather more data on the path of inflation and employment.” The St Louis Fed’s Musalem said that he would have agreed to a rate hike as well (he doesn’t vote on policy this year), noting that “there definitely are very large and meaningful supply shocks playing out in the global and US economy. At the same time, we have persistent demand pressures in the economy.” His description of optimal policy echoed Kashkari’s as well, “at this juncture, earlier, incremental, gradual interest-rate action is preferable, less costly and less disruptive than potentially later, larger and abrupt actions.”
The Richmond Fed’s Barkin, a centrist on the Committee who’s background in consulting lends him a unique perspective that rarely includes explicit forward guidance, said that July was a “close call” and “that there’s time before the next set of meetings” to see if the data more clearly calls for tightening or not. He finds the current cost pressures driven inflation less concerning that proactive margin accreting price pressures but that he wonders “are rates still restrictive today like you thought they were? And if you don’t think rates are that restrictive today, the evidence for that could be nominal consumption or the AI investment boom.” Barkin defended Warsh’s answer on the inflation target during the press conference, by saying that he would prefer moving to a range target but that could only credibly be done once the Fed was back to 2%.
The FRBNY’s Williams struck his usual center-dovish tone following the meeting. He “strongly” supported not hiking rates at that meeting. The June Minutes’ characterization of the possibility of future hikes if inflation surprises to the upside, but not if it decelerates cleanly towards 2%, clearly describes Williams well still; “what are we seeing in the core inflation data over the next several months, and is that consistent with a kind of a run rate of inflation moving towards 2% and really on a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028.” After years of upside inflation, with a stable labor market, this is a very gradual appropriate policy baseline return of inflation to target, but the embedded optimism of 0.20% or less prints for the rest of the year consistent with the June median 3.3% core PCE remains a clear disinflationary bar for not acting.
There was some implicit discomfort with Warsh’s statements, and embedded tone, around the market doing much of the FOMC’s work for it. Williams was quite clear that “I know that we have to do the work ourselves, but sure, those are factors that affect conditions, and we’re aware of that. But it doesn’t tell us what to do.” Musalem echoed that tone, in a bit more declarative way, “Congress gave the FOMC the responsibility to achieve price stability and maximum employment. It did not give that responsibility to markets… Markets did some modest tightening of financial conditions before the meeting. That’s a statement of fact. I don’t think it’s outsourcing.” The other hawks have seemed open enough in their views that while financial conditions may have shifted around a bit, but they are still fairly easy and any short-term moves are not a reason for policy inaction.
