Fed: Middle Ground

Published on March 21, 2018

Federal Reserve Chairman Jerome Powell turned in a very direct and to the point first press conference — though perhaps a tad too spartan — to cap off what seemed to us a straight down the line Federal Open Market Committee meeting statement and Summary of Economic Projections.

*** Chairman Powell made the point in the presser there was no small amount of uncertainty in the forecasts, especially in the full effects of the fiscal stimulus. On balance, our sense is that the FOMC and staff were quite cautious in their projections of the upward fiscal effects, allowing for what the Chairman described as a “middle ground” on the rates projections. That, to us, points to another rate hike in June and further room to the upside in the June SEPs, in something of a staggered reaction function to the fiscal stimulus. ***

*** The Fed’s ability to continue its gradual pace of rates normalization — Chairman Powell must have repeated “continued” a dozen times — may depend on the inflation dynamics over the coming months: the “transitory” dip in inflation last spring should be dropping out of the data to lift core PCE back to prior levels, while the expected upward Phillips Curve effects may finally begin to show up in the underlying inflation trend. “There’s no sense in the data that we’re on the cusp of an acceleration in inflation,” Powell reassured. He could have added the absence of any higher inflation would be concerning. ***

Just a few highlights on the day’s policy takeaways:

** On the rate dot plots that drew such a high profile going into this meeting, the FOMC kept the 2018 median rate dot plot to (barely) three with a steeper rate trajectory in 2019 and 2020 as we expected (see SGH 3/12/18, “Fed: Backloaded”). The median fed funds range for the end of 2020 rates was projected at 3.25%-3.5%, or a good 50 basis points over the longer run neutral estimate, which itself was nudged up a bit.

** If anything, the growth projections weren’t really as strong as we thought they could have been considering the twin fiscal stimulus of the tax cuts and two year budget deal. A 2018 median of 2.7% was probably at low end — some Committee members marked 3% — and as we wrote, the important uptick in the growth projections was in 2019, jumping to 2.4% from 2.1% in December, though growth then falls quite a bit, one assumes due in part to the outright rate tightening.

** The headline unemployment rate will be further falling, but only to a median this year of 3.8% and only 3.6% in 2019 and 2020 (at least one participant pegs the rate as low as 3.3% in the latter two years). So the Fed is assuming either a heck of a lot more part-time, long term unemployed, or those previously claiming disability will be flooding into the labor market, or the pace of job creation will soon drop down to the break-even levels estimated at around 120,000 a month.

** But the big jump in projected growth next year, instead of the fading effects of the tax cuts that were forecast in December, is probably what drove the median core PCE inflation projections above the 2% inflation target to 2.1% as soon as 2019 and again in 2020. It was, without fanfare, an affirmation the inflation target is indeed symmetrical. It will be interesting to see, in the September SEPs, if the inflation projections slips back to 2% in 2021.

** Trend growth was kept at 1.8% with no change in the full range of longer run growth estimates, so color the Fed skeptical, for now, on the tax cuts lifting productivity and potential growth. The longer run unemployment estimate was tweaked down to 4.5%, which could be expected and may still go lower. That nudge up in median for the longer run neutral rate to 2.9% seems a bit early to us, but it could be something of a rounding effect.

** On the press conferences after every meeting, Chairman Powell clearly knew the question was coming and replied simply that he is “carefully considering” it, but has made no decision yet. He also noted that they will want to be sure the announcement on the frequency of pressers is not misconstrued as a policy signal in itself, one of the issues we highlighted earlier (see SGH 3/19/18, “Fed: Pressers”). But we do expect it will become policy in the second half of this year.

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