A couple months ago I wrote an article identifying the new voters coming into the Fed’s Open Market Committee. This group is the ‘voting arm’ of the Fed, the individuals who will vote on policy. Three new players take a seat at the table starting with the next meeting at the end of January – Neel Kashkari (Minnesota), Patrick Harker (Penn) and Rob Kaplan (Dallas).
These new voters are committed to the Fed mandates of price stability and maximizing employment. The extraordinary amount of stimulus in the economy since the 2008/09 financial crisis has been removed slowly like a needle injected into an arm. Interest rates are still quite low and present a very accommodating condition for markets. Long term rates are still well under historical levels.
The new voters on the committee have tended to be more ‘centrist’ policy minds, and the removal of a couple of ‘hawks’ will probably make discussions at the table less tenuous. But with the goal in mind to return to normalized policy and remove monetary policy in favor of fiscal policy, look for continued moves up in short term rates. The last Fed forecast (which included these new voters’ opinions) says we could see three rate hikes over the next 12 months.
That would not be a tragedy, especially if some fiscal policy stimulus supports economic growth. With already low unemployment the Fed will be more concerned about stable prices, always ready to snuff our any abnormal rise in inflation expectations.
