US and Federal Reserve Presidents Set Expectations

Trump reaches out to both sides of the aisle, while Fed hints at imminent rate hike

After forty days in the political wilderness, President Trump pivoted from campaigning to governing. His address Tuesday night before a Joint Session of the Congress was conventional in its relative optimism that the nation’s problems could be solved, but lacked finger-pointing about the role of the people in the chamber in creating those problems—especially when compared with his inaugural address. Indeed, he reached out to both sides of the aisle on occasion.

His agenda was long and mostly unspecific. It sounded like he supported Speaker Ryan’s plan on repealing and replacing the Affordable Care Act (ACA) with tax-advantaged private purchases and health savings accounts. Whether this was enough presidential ownership to push legislation along is doubtful, but leadership on Capitol Hill probably took some solace from it. They will need more help, however, to overcome the hurdle they have created for themselves. By characterizing the ACA as a disaster and putting its repeal first on the legislative list, replacement legislation is the early, huge challenge in holding the divided Republican majority together.

Keeping that coalition together makes possible the other items on the economic policy list that the president ticked off—including increasing the military budget, spending $1 trillion on infrastructure, and enacting a large tax cut. The president even added items from Democratic talking points—making possible accessible child care and paid family leave. The address helped move all these ambitions along, but, as of now, the policy arc seems on a trajectory that will disappoint the expectations apparently built into financial prices of quicker and more decisive action.

The US president was not alone in working on expectations on Tuesday. Federal Reserve Bank Presidents Dudley and Williams sought to convince market participants that action at the upcoming FOMC meeting was on the table. In Dudley’s words, the case for an imminent rate hike was “a lot more compelling.” Fed officials never surprise markets (acting when there is not a significant probability built into prices) but they sometimes disappoint (not acting when the probability of doing so is built in). Dudley and Williams were making sure that action was not a surprise. It is up to the last Fed speaker of the week, Chair Janet Yellen, to determine if there will be a disappointment.

These comments were not likely orchestrated, but rather the two were channeling what they had heard from conversations with Chair Yellen, as they discussed the upcoming meeting. Staff briefing documents and a draft statement would not yet have circulated. Chair Yellen gets the final word, but for now, put the probability of a 25 basis point hike in March at two-in-three.

Two other points of note.

First, William’s argument for acting in March voiced one of the reasons the more-dovish Yellen would not want to act: a move then makes it easier to tighten more than three times in 2017. If Governor Lael Brainard does not push back on that argument in her remarks later this week, then the skids are greased for action.

Second, Dudley’s remarks solve the mystery of the Wall Street Journal’s coverage of the January minutes, which inexplicably characterized them as foreshadowing a rate hike. The reporter must have been encouraged to do so from a reliable source at 33 Liberty Street.

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