Fed: Appropriate Behavior

Published on December 11, 2019

A couple of things occurred to us by the end of today’s Federal Open Market Committee meeting and Fed Chairman Jerome Powell’s press conference:

** The first and most noteworthy is the evident collapse of hawkish resistance to the Fed’s very dovish policy stance going into 2020. The strength of the consensus was noteworthy, for one, in that only four of 19 Committee members even thought a single rate hike might be appropriate next year, and that even when median unemployment is projected to stay at 3.5% in 2020, and only rising to 3.7% by 2022. We were frankly a bit surprised the median longer run unemployment  estimate did not fall more than just to 4.1% from 4.2%, but we still expect it to slide further to 3.9% or lower by March or June.

** That new consensus to us reflects two very recent developments under Chairman Powell’s leadership, neither of which came up explicitly in the press conference but which run like two threads through the policy decisions today: the first is the deepening acceptance of just how low and inertial inflationary pressures truly are, and second, how that in turn allows for the embrace of an Arthur Okun-looking “high pressure” economy with monetary policy repositioned just below estimated short run r* levels to keep a modest accommodation in the economy: an ever tightening labor market, slowly rising wages, and broadening employment opportunities by all accounts sure looks like an elusive “soft landing.”

** We also liked that Chairman Powell noted a handful of Committee members had marked an inflation overshoot in their core PCE projections, admittedly because we had already written that it was a possibility (see SGH 12/9/19, “Fed: December’s Likely Dovish Hue”). In fact, while the core PCE projection never rose above 2% across the next three years, by our count, at least four Committee members were marking a modest overshoot to at least 2.1% by 2021. All else being equal, we suspect there will be more doing the same by March, which to us is further indication of just how dovish the Powell-led FOMC will be in  their reaction function to incoming data to get inflation higher.

** Indeed, that deeply dovish-tilted reaction function will be the critical driver to any “material reassessment” of the outlook next year. And in any case, we think the odds are somewhere between nil to none for a smooth run of US monetary policy run while the FOMC steps back for an academic pondering of changes to its policy framework. Instead, we are almost certain there will invariably be plenty of shocks, both small and not so small, amid what is near certain to be a highly volatile political run to the November elections among other things, not to mention the probabilities for financial excesses reaching uncomfortable levels.

** One last thought was how low key, even boring, the press conference was, as reporters were clearly struggling to think of something punchy to ask Chairman Powell. One reporter near the end almost got there, asking if there were things, “he might have done differently, any lessons to take into next year?” And for just a fleeting moment, Powell looked like he was going to answer, before realizing that answering such an open ended, loaded question was exactly one of the lessons learned. He deftly deflected and pivoted back to noting yet again the economy was “in a good place.” No “auto pilot” shrugs this time, and the Chairman must have been feeling pretty pleased with how the day went by the time he headed home tonight.

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