At the upcoming meeting of the Federal Open Market Committee (FOMC) on June 12 to 13, Chair Yellen will remain the dominant voice on the design of monetary policy. FOMC participants will bend to her preference for well-telegraphed, modest policy hikes at each of its four press-conference meetings. This lays a brick foundation for a staircase along which the federal funds rate rises one percentage point per year, preserving Yellen’s preference for a lower-for-longer policy path. All along that predetermined climb, officials describe each decision as dependent on the data and made meeting by meeting.
This is why market participants view the upcoming meeting as a nonevent event, it is already completely built into financial prices. We heard the clicks of the Fed telegraph in the minutes of the prior meeting, and there is a press conference following this one. At that gathering, expect the Fed chair to explain one more step up the Yellen staircase.
Except, the Fed chair offering the “data made us do it” explanation will be Jay Powell. Janet Yellen left the building in February, although her intellectual spirit lingers, mostly by default. Market participants apparently prefer being pulled along by plodding but patient policymakers. This precedent is so well established that it is easier for the Fed to keep along this path than risk the general confusion that would result from straying. If the Fed had tightened at the May, non-presser, meeting, market participants would have ratcheted up the path expected for the fed funds rate by a factor of two—from four hikes a year to eight. And if the unthinkable— no action at the June meeting—happens, everyone would assume that this tightening cycle is done and dusted. So much is read into Fed action that investors would assume that inflation is off to the races in the first case and that the US economy is rolling over in the second.