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The Last Fed Speech Before The Fed’s September 20-21 Meeting Was Dovish

Economic News
Fed Governor Lael Brainard and the “New Normal”

Fed Governor Lael Brainard gave a speech yesterday entitled: ‘The “New Normal” and What It Means for Monetary’. Last month, Fed Chair Janet Yellen gave a speech on August 26 at Jackson Hole Wynoming entitled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future”.

In Ms. Brainard’s speech we learned that she believes there are structural issues in the economy leading to lower growth. Ms. Yellen’s speech was slightly more optimistic and self-congratulatory on the state of the economy. Ms. Yellen indicated that despite the progress she saw in the economy, the Fed needed to be aware of challenges it may face in the future. Ms. Yellen’s speech outlined a “tool kit” of future monetary policies that may be employed to fight off the next recession, including broadening the range of assets that may be purchased in conjunction with a future quantitative easing program.

The assessments by Mmes. Brainard and Yellen of the global economy, however, were not what held listeners and readers of their speeches captives. Rather, it was their view on the direction of interest rates that was of interest. Market participants wanted to know whether Ms. Brainard was in favor of raising interest rates at the Fed’s meeting later this month. If so, then perhaps a September rate hike might be a done deal.

Ms. Yellen’s August Jackson Hole speech appeared to indicate that in Ms. Yellen’s estimation, the economy was chugging along and perhaps an interest rate hike was warranted. Fed Vice-Chair Stanley Fisher reconfirmed Ms. Yellen’s view that a rate hike would indeed be “on the table’ at the Fed’s September 20-21 meeting. Mr. Fischer added that the upcoming Non Farm Payroll number would be an important determinate in the Fed’s decision whether to raise rates.

On Friday September 2, the Bureau of Labor Statistics released Non Farm Payroll numbers for August that missed expectations by a fairly wide margin. With a sub par Non Farm Payroll number behind them, most market participants believed that the payroll “miss” would call off any rate hike the Fed may have been considering in September. On Tuesday, September 6 the economy received further bad news as the ISM services indexed missed expectations and edged towards contraction as had the manufacturing component of the same index as reported on August 31.

Enter The Fed Interest Rate Hike Possibility Brigade

With recent incoming data disappointing the markets, market participants once again seemed to rule out the possibility of a rate hike in September. Then on Wednesday September 7, Fed Presidents Williams and Lacker revived the possibility of Fed rate hikes with speeches indicating that they thought the US economy was strong and rate hikes were warranted. Market participants shrugged off these speeches and gold and silver consolidated their gains from rallies earlier in the week. It wasn’t until Friday September 9, however when Boston Fed President Rosengren indicated that he also backed gradual rate hikes that market participants began to take the Fed chatter about rate hikes seriously. Later on Friday, the Fed added a speech by Lael Brainard to the calendar for Monday September 12.

On Friday, US stock markets fell sharply as did gold and silver as they braced for the impact of confirmation by Ms. Brainard of an interest rate hike in September.

Ms. Brainard’s speech yesterday was of interest to market participants for one primary reason – the inclusion of the word “prudence”. Ms. Brainard ended the final paragraph of her speech with the following sentence: “This asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation.” After nearly a decade of Fed policy accommodation , Ms Brainard, let the world know that it still might not be time to remove that accommodation by raising interest rates.

Equity markets and gold and silver staged a relief rally yesterday after Ms. Brainard’s speech. Today, however, equity markets and gold and silver gave up their gains, perhaps indicating market participants have things other than Fed interest rate policy on their minds.

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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.