Fed: December’s Likely Dovish Hue

Published on December 9, 2019

The most remarkable thing going into this week’s year-end meeting of the Federal Open Market Committee is how little is expected to come out of it. Indeed, after the last year of the pivot, the sharply binary trade-driven outlook, and the political assaults by the President, it would be a noteworthy mark of success if Fed Chairman Jerome Powell manages to steer his way through his presser with barely a stumble or ripple in the market waters.

A good reason that may indeed be the case this Wednesday afternoon is what we expect will be an unmistakably dovish hue to the intended takeaways from the press conference, the statement, the Summary of Economic Projections, and the rate dot plots:

** For instance, while there are likely to be only minor tweaks to the Summary of Economic Projections for real growth and headline unemployment across the three-year forecasting horizon, the assumed longer run unemployment level is likely to come down, perhaps sharply, with enough of a previously resistant Committee majority throwing in the towel on their Phillips Curve assumptions to bring the median down to 4%, and perhaps even 3.9%;

** In a similar fashion, we suspect more Committee members and their staff will be marking down their estimated longer run neutral level, with a more solid-looking consensus 2.5% median, while some Committee members already at 2.5% may go further south, and even if not enough to move the median even lower, the newly dovish presumptions of the FOMC will be unmistakable;

** And very much in the same vein, with a newly emerging consensus across the committee on the merits of a “high pressure” economy and the benefits to wage growth and improved opportunities in the tight labor market, we think core PCE projections are likely to be marked a tad higher to show a modest overshoot of the 2% symmetrical target, with at least a 2.1% median by 2021 and certainly in 2022;

** And more to the point, to get there, the assumed appropriate rate policy path will in all likelihood need to be modestly marked down: in 2020, for instance, the median will almost certainly be marked at the 1.625% mid-point to the current 1.5%-1.75% target fed funds range while the 2021 median may still show only a single rate hike back to 1.75%-2%;

** The median 2022 rate dot plot may show a greater assumption on the need to push rates higher, with a more elongated looking dot plot, primarily due to a wider dispersion of the views on inflation dynamics that still prevails across the Committee. But the main takeaway from the dot plots will be the 2020 rate median that is some 175 basis points lower than the December 2018 rate projections, underscoring the extent of the Fed’s policy pivot this year.

** Otherwise, there will obviously be no rate change, with only minor changes to the statement, with perhaps a tad more upbeat note on the labor market in the descriptive first paragraph and, keeping in mind the looming trade tariff decision by the Trump Administration that could be just days away, retaining the phrasing in the newly minimalist guidance that the “uncertainties about this outlook remain” would seem warranted.

** Chairman Powell will also know he is going to get the same question cut a half dozen different ways on how the Fed is defining a “material reassessment” of the forecast that would drive a rate move: while the bar has clearly been set very high for a hike but lower for an ease, even if he does his best to script on the economy being in a “good place” and shies away from offering specific guideposts, our sense is that it would take several months of clearly sub-par jobs creation or faltering retail sales to put a rate cut back on the table.

** And finally, on potential changes to the policy framework, we suspect Chairman Powell will simply defer to the work underway that is likely to be finalized and unveiled at the May or June 2020 FOMC meeting. Clearer indications of which way the Committee thinking is leaning about so-called “make-up strategies” on inflation, or its future playbook in response to a likely frequency in hitting the effective lower bound, will probably show up in the December meeting Minutes.

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