In a mere two and a half months Jay Powell has been able to accomplish something his previous two predecessors, Ben Bernanke and Janet Yellen, were not able to achieve during their tenure. That accomplishment is a unified stance on the conduct of monetary policy.
Heretofore staunch opponents for raising interest rates are now echoing Chairman Powell’s optimism about economic growth and concern of rising inflation.
- Lael Brainard, one the big proponents in the past for keeping interest rates low and in our opinion the sole reason the Fed did not start raising the overnight rate in September of 2016, seems to have changed her stripes with the release of her speech on March 8, 2018. In the speech titled ‘Navigating Monetary Policy as Headwinds Shift to Tailwinds’ Brainard notes that “the most notable tailwind is the shift in U.S fiscal policy stance from restraint to substantial stimulus in an economy close to full employment.” Mounting tailwinds, as she put it, with full employment and above-trend growth, has changed the landscape, making it appropriate for continued increases in the overnight rate.
- Charles Evans, Chicago Fed president, also a said ‘dove’, seems to have followed suit. On April 7, 2018, the day after Jay Powell delivered his speech to the Economic Club in Chicago, IL about the outlook for the economy, Evans stated that he is optimistic inflation will reach the Fed’s 2% goal and that further rate increases are appropriate.
- Neel Kashkari, arguably the most dovish of doves, appears to be changing course. The Minneapolis Fed president who dissented all 3 times the FOMC raised the overnight rate in 2017, was interviewed by the Wall Street Journal on April 12th and stated that it’s likely that the fiscal actions that have been taken are going to help achieve the Fed’s 2% inflation goal this year. He also noted that in his district business leaders are expressing more optimism and seeing signs of wage pressures slowly building as slack is being used up.
Bottom line, the Powell led Fed, through a unified message is attempting to prepare the markets for rising interest rates.
We have positioned our client’s portfolios with a shorter average maturity to take advantage of rising interest rates.