Fed: Move Along Folks

Published on February 1, 2017

Federal Reserve officials should thank President Trump for grabbing all the attention and headlines in the last week or so that would normally be speculating on what the Federal Open Market Committee may or may not signal in this afternoon’s statement. For in this case, not all that much, and certainly nothing about March.

*** We still think the odds on a March meeting rate move are very low. Barring an improbable surge in inflation or a spectacular tightening in the labor markets over the next weeks and months, the Fed will be biding its time until deeper into the spring when there may be greater clarity on the Trump Administration’s fiscal, tax, and trade policy ambitions. ***

*** We still do not expect a rate hike before June at the earliest, and two hikes this year is still the base case, with the option of a third move as insurance against an inflation upside surprise. This is going to be a reactive FOMC this year, not a preemptive one looking to head off a presumed inflation stoked by stimulative Trump Administration fiscal policies (SGH 1/19/17, “Fed: On the Near Policy Path”). ***

Inflation Will Rise

The most that can be said about the statement today is not a hawkishness but what feels to be an ever so modest Fed confidence in that they noted inflation will rise to 2% instead of sticking with the less assertive “expected to” phrasing.

They likewise seem to be saying so far so good on their central tendency forecast from a month ago: both overall economic activity and household spending continued to “expand” or “rise,” job growth was still “solid,” and the unemployment rate “remained near its recent low,” while consumer and business sentiment had “improved as of late;” the transitory downward pressure of lower energy and import prices had fallen out of the data, while market-based measures of inflation compensation “remained low.” What is there not to like?

The Committee would have also discussed a review of their annual “Statement on Longer-Run Goals and Monetary Policy Strategy,” but we doubt there will be any changes this time compared to last year’s tweak to affirm the symmetrical nature of the 2% inflation target.

And finally, it would have been interesting if not unusually frank if the FOMC had opted to include a mention they will be undertaking a revision of its balance sheet policy through this year. We do think they will be doing just that, and that the Committee no doubt picked up on the myriad balance sheet issues at this meeting from their December meeting discussions, which should invariably show up in the Minutes in three weeks.

But our sense is that the update to the September 2014 Exit Principles is in fact many months away. And while Chair Janet Yellen is going to be asked about the balance sheet in her upcoming mid-February testimonies on Capitol Hill, we suspect she will offer little new detail beyond the current guidance that balance sheet normalization will only begin after rates normalization is “well underway,” that it will be “gradual,” and that it will aim for the minimal size needed for the “efficient implementation of monetary policy.”

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