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Fed's Williams: 2-3 rate hikes in 2016 about right

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Comments from the Fed's Williams in New York:

  • Expects GDP growth of about 2%
  • Lower inflation expectations somewhat worrying
  • US economy to face some headwinds from abroad
  • US is basically at full employment
  • Sees inflation moving to 2% over next year or two
  • Wages have been puzzling part of US economy
  • Sees encouraging signs that wages are picking up
  • Sees 2-3 hikes this year, 3-4 in 2017
  • Fed leaving balance sheet as it is for now
  • Balance sheet will organically shrink over time

BoA / ML on the Fed: June, nah. July, nah. September, yep.

BoA / Merrill Lynch on the timing question of the next Fed rate hike

  • Clear that June is very much on the table
  • What is less clear is whether the Fed is just protesting the super-low probability priced into the markets or is setting us up for a June hike
  • We are sticking to September
  • September still seems most consistent with Yellen's high risk aversion
  • June seems a bit early given how dovish she has sounded
  • With the market pricing in just a 34% chance of a move, it would shock the markets and bring into question their credibility ... This would draw attention to the competence of the Fed during an election year
  • The Fed would also be moving in front of the Brexit vote, a potential serious shock to financial markets
... This is a close call and we will be nimble going forward. Payrolls on June 2nd and a Yellen speech on June 6th could change our mind.
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Interesting comments from ML on July, though:
July is also live, but suffers the usual problem of not having a scheduled press conference
The Fed has made it clear that they can call a press conference on short notice. However, it would still require meticulous preparation from Yellen.

Fed's Yellen: We're want to do everything to avoid a financial crisis

She's talking about her academic past and broad themes in economics, not the outlook.

  • Fed's handling of crisis was 'nothing short of magnificent'
  • QE and forward guidance have helped economy recover
  • I saw the housing price bubble
  • I didn't see the financial crisis coming
  • We're trying to do a better job of seeing systemic and financial risks
  • We're better at seeing financial risks and conditions now

 Finally on the economy:

  • Labor market by almost any metric has really improved
  • We've created 14m jobs since low point of employment
  • Labor force participation has moved up in past year, that's encouraging
  • No of part-time workers who want full-time work is high
  • We haven't seen much improvement in wage growth, which is suggestive of some slack in the labor market
  • Productivity growth is very slow, 'miserable' in historical perspective over past 5 years
  • Inflation remains below the Fed' goal
  • Our measure increased only 0.8% y/y, partly due to oil and USD
  • My own expectation ... is that inflation will move back up over the next couple years to our objective
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