MNI INSIGHT: New FOMC Not Precommitted To Hawkish Rate Path

--Powell, Who Becomes Fed Chair Saturday, Augers Continuity

--Newcomers Quarles, Goodfriend, Barkin May Not Be As Hawkish As Analysts Expect

By Jean Yung

     WASHINGTON (MNI) - A perceived hawkish tilt in new leadership at the

Federal Reserve Board and this year's rotation of regional Fed bank presidents

argue for a shift to a more aggressive pace of rate hikes, but that sentiment

may be overstated, MNI understands. 

     There may indeed be such a shift underway as the economy continues to gain

speed, but the changing of the guard alone is not the grounds for the FOMC's

change of approach, sources close to policymakers told MNI. 

     A global growth spurt, U.S. tax cuts and easy financial conditions skew

near-term risks to the upside. Inflation, still below the Fed's 2% target, is

expected to rise this year as the labor market tightens further. A hike in March

seems locked in at this point, moving the focus to whether the Fed might see a

need for more than the three rate increases it currently anticipates for 2018. 

     --POWELL'S CONTINUITY MESSAGE

     In the rearview is Janet Yellen and the era of cautious recovery over which

she presided, as Fed officials held rates lower for longer than many had

anticipated on account of persistent low inflation and subdued growth. Fed Gov.

Jay Powell will be sworn in as chairman Monday to head a new Board staffed by

fellow Trump appointees Randy Quarles and Marvin Goodfriend, provided the Senate

confirms Goodfriend. A vice chair pick will also come soon, according to Trump

adviser Gary Cohn, potentially followed by Trump's choices for three other empty

slots. 

     Powell has signaled during his confirmation process that he intends to

continue the Fed's current approach of gradual tightening by slowly raising

rates and allowing assets to run off the balance sheet as they mature. Centrists

on the Federal Open Market Committee have penciled in a baseline of three hikes

this year, and there is nothing to suggest Powell is outside of that camp. 

     His views will certainly evolve and react to changing conditions, but to

the extent the Fed is projecting current conditions prevailing over the medium

term, there may be little difference in the general thrust of policy under a

Powell Fed. 

     --GOODFRIEND REPRESENTS MAINSTREAM

     Some have noted Powell's lack of graduate-level economics credentials, and

that Goodfriend's selection was meant to add some academic heft to the Fed

Board. 

     A well respected economist with mainstream views who spent many years at

the Richmond Fed, Goodfriend could have significant intellectual influence at

the Board. He is known as a gutsy thinker willing to take on his own

organization and would not hesitate to make his position known -- perhaps even

going as far as breaking with consensus to cast a dissent, a rare move among Fed

governors. 

     Last March, when inflation was verging on 2%, he said in an interview with

Bloomberg Television that the Fed was already "behind the curve" and he hoped

that the FOMC would move preemptively to stabilize inflation. There was "enough

pressure in the pipeline" for the Fed to put together a "small campaign" of

hikes over 2017 to take the fed fund rate above 2%, equivalent to six rate

increases in a year. 

     Inflation has since retreated to 1.5% for reasons that have stumped

officials, yet the Fed, doing as Goodfriend advised, has pressed on with

tightening. 

     It's also worth noting that the Carnegie Mellon University professor has

been an outspoken advocate for negative interest rates during downturns, a

policy that even longtime doves on the FOMC have not embraced. If the U.S.

economy experiences a serious reversal, he would likely be a voice for

considering a policy response that so far has been met with limited enthusiasm. 

     --DIFFERENT FOCUS

     Two other newcomers to the voting bloc on the FOMC this year may be more

inclined to fall in line with the consensus view. 

     Quarles, named the Fed's first vice chair of supervision late last year, is

likely to keep his focus on matters of bank regulation. Given his longstanding

professional relationship with Powell going back to their time at Carlyle Group,

as well as the traditional deference by governors to the chair, he may not opine

too frequently on monetary policy, preferring to voice differing views

internally. Daniel Tarullo, his predecessor in fact if not in title, was

reluctant to wade into policy debates. He spoke on rare occasions and did not

stray from the consensus when he did.

     Among this year's rotation of Fed bank presidents, only one has yet to give

any insight into his thinking on monetary policy: freshly appointed Richmond Fed

President Tom Barkin. The regional Fed bank has for years had presidents with

hawkish views on monetary policy. Jeffrey Lacker, who stepped down in April,

repeatedly dissented in favor of higher rates. 

     However, the appointment of Barkin, a McKinsey executive, signals the Fed

bank preferred strong management capabilities over strong monetary policy views.

The Richmond Fed is responsible for the IT infrastructure of the Fed system with

hundreds of employees working in that capacity. Over time Barkin will likely

develop his own policy position, but he may follow the well-worn path of other

FOMC newcomers and wait to gain a year or two of policymaking experience before

staking out public views. 

     --ECONOMY IN DRIVERS SEAT

     Hence the changing composition of the FOMC does not suggest a radical

departure from the policy stance of recent years. An economy that's found its

legs won't force the central bank to raise more rapidly than anticipated -- at

least as long as inflation data cooperate.

     What's more, how the new slate of officials' attitudes might change should

the economy experience a severe downturn is a question mark. How they manage a

more orthodox economic expansion and rate hiking cycle may bear little relation

to their inclinations on unorthodox monetary policy. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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