Fed: “The Economy is Doing Well”

Published on March 15, 2017

For all the times Federal Reserve Chair Janet Yellen was only too happy to get to the end of her quarterly post-meeting press conferences, at this one she seemed to be actually enjoying herself, a confident tone threading through calmly delivered, mostly declarative sentences.

Asked what the message of today’s rate hike should be to consumers, she even smiled: “the economy is doing well.”

*** The Federal Open Market Committee raised the target fed funds target range by 25 bp as was widely expected after the messaging campaign of the last few weeks, and which we indicated was likely (see SGH 2/13/17, “Fed: March Positioning”). The FOMC likewise kept the 2017 median rate dot projections at three hikes, which we still think remains the base case for the year, and assuming the data stay in line with the Fed’s projections, which in fact barely changed from December. ***

*** Chair Yellen, in fact, took care to push back as we thought she might against any excessively aggressive takeaway from a March rate hike as signaling the Fed’s intentions to hike three more times this year in quarterly rate moves (SGH 3/14/17, “Fed: Higher Rate Dots Loom”). The Fed may end up hiking four times this year — it depends on whether the data slips above the current expectations — but for now it is simply too early to signal the probabilities on such a pace. ***

*** But in our minds, one of the more important takeaways today was the inclusion of “symmetric” in the statement’s reference to the inflation target. It was the trade-off we were expecting within the Committee in the way the policy consensus would be crafted for a modestly “dovish hike.” And, crucially, it marks a key moment in the evolution of the long policy normalization strategy in which the FOMC can afford to look at deflation risk in the rearview mirror. ***

A few other points stood out for us about the policy statement, the Summary of Economic Projections, and the rate dot plot:

On the statement:

While the statement itself was more or less in line with expectations, the references to inflation were spruced up a bit to acknowledge how close inflation is getting to the Fed’s 2% target, by taking out the “In light of the current shortfall of inflation from 2 percent” altogether and otherwise noting it is only “somewhat” below the 2% target, or affirming it will “stabilize” around 2% and that policy will support a “sustained” return to the target.

Much of that was more in line with a spring housecleaning of the language to better reflect how the data is looking in an economy so near the Fed’s twin mandates. And as we noted above, all of the inflation language was put into its policy framing by the “symmetric” insert to remind everyone of the tweak a few years ago to the “longer run goals and monetary policy strategy” that the 2% inflation target is not a ceiling, and that actual inflation may run under the target, and as Chair Yellen noted this afternoon, “sometimes it’s going to be above 2 percent.”

They also deleted the “only” before the mention of the “gradual” removal of monetary accommodation, but for the life of us, it is hard to read much into it other than the spring clean-up of the language we just mentioned.

And on those rate dots:

The rate dots this time seemed to more or less mirror what we think the FOMC’s intended messaging takeaway was from the March meeting policy decisions, and the thought just occurred to us that perhaps this is why Chair Yellen was feeling a little more relaxed this time round?

The rate dots did all migrate upward across all three years of the forecasting horizon as we expected, and as we also expected, not quite enough in 2017 to nudge the median from where it remained at three hikes to four, for which many had braced.

We were a bit surprised though the 2018 rate dot median did not rise to four from three, since there were only three rate dots marked below 2% compared to seven in December and with a very slight upgrade in median inflation this year to 1.9% and growth in 2018 nudged up to 2.1% from 2%. Meanwhile, the rate dots in 2019 were interesting for what looked like a fairly unusual convergence that far out the horizon.

But most of all, it was noteworthy to us that for the first time that we can recall, nine FOMC members, a majority, were now projecting a year-end fed funds rate at or higher than the 3% longer run neutral estimate, or seeing the need for an outright tightening two years from now — and that is almost entirely before the assumed stimulus down the road from the Trump Administration’s fiscal, tax, and regulatory policy mix.

The estimates for the longer run neutral rate barely budged, though one Committee member did nudge his or hers back up to 3%, and we suspect there will be more upward movement like that in the longer run neutral through this year. And that should be taken as or more hawkish than whether the March 2017 rate dot median was three or four.

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