For all the debate over the merits of the blue dot rate plots, all the policy messaging to be taken from today’s Federal Open Market Committee meeting was loaded into the dots and the assumptions behind them. So much so, we almost forgot to read the statement.
Indeed, Chair Janet Yellen, at times dismissive of the dots, clung to them this afternoon for all they were worth, using them to chart how the Fed’s policy path was changing, even though the economic projections weren’t actually changing all that much. “It will require a lower path to meet the same target,” she explained.
Some takeaways from today:
** More than anything, it struck us how much the assumed longer run neutral policy rate was marked down, to a median 3.25% from 3.5%, and how important that looks to be in squaring the circle of keeping inflation no higher than its 2% target three years from now. Chair Yellen essentially confirmed that risk management concerns over global growth concerns drove the caution in probably moving rates only twice this year.
** To offset the lower projected rate increases this year, however, the dot plot marks a quickening in the pace of the rate hikes from two to four hikes in 2017 and another four or more in 2018. But even then, the steepness of the rate trajectory would have had to be even steeper – and thus stretching anyone’s definition of a “gradual pace” – if the longer run neutral real rate wasn’t lowered by so much.
** The Fed, in fact, will still be running a pretty accommodative policy three years from now. While real growth was marked down to 2.2% from 2.4% this year, it will still be above trend growth for long enough to drive the headline employment rate all the way down to 4.5% by the end of 2018. It means the labor market is expected to run well under its 4.8% estimates of NAIRU (itself a lowered estimate from 5%) across all three years of the forecasting horizon.
** That suggests to us that while Chair Janet Yellen affirmed the Fed is not intending to “engineer” an overshoot of inflation, the revised Summary of Economic Projections and especially the rate dot plot seem to underscore the tweak to the FOMC’s “Statement of Longer Run Goals and Monetary Policy Strategy” in January that a “temporary” overshoot of what is, after all, a symmetrical 2% target cannot be ruled out.
** This is a Fed, in other words, that is determined to drive inflation higher to mandate-consistent levels. To ensure that, and to make sure it does not fall back to the Zero Lower Bound any time soon, it intends to take its time in moving rates higher in the near term while neutralizing imprudent inflation risks down the road by quickening the pace of hikes later.
** Two other things of note is how far the Fed has in effect moved towards the market’s pricing of the rate trajectory, though it has to be said its assumed terminal rate remains far north of most market assumptions. And likewise, the Fed has also moved some distance towards an embrace of the lingering effects of secular stagnation.
** The Phillips Curve is still alive and well in the Fed current rate dot projections, but it is a policy trade-off for later rather than now. Its timing will be ultimately determined by how much the effective equilibrium real interest rate is indeed rising as the economy heals and the transmission channels of monetary policy are further cleared. But the bet, for now it seems, is not any time soon.