Fed sticks to the plan

Posted on September 21st, 2017

The FOMC pretty much stuck to their outlook for the economy.  They indicated that the impacts of Hurricanes are unlikely to impact the broader outlook and the effects will be concentrated in the next two-quarters.  However, they did raise their GDP forecasts this year; it seems on rebuilding activity before year-end outweighing the near term disruption.

A hike in December seems more likely with no more Fed members than in June forecasting no further hike.  Four members see no further hike, 11 see a hike, 1 sees two more hikes this year.

The outlook for rates next year is also largely unchanged (three hikes).  The downward revisions were not enough to move the median.

For the moment, at least, this statement, that was probably close to expected, but a bit more hawkish than some feared, has caused a pause in a weaker USD trend.  It remains to be seen how long this strength will last.

We can see a case for the USD to sustain gains, but the broader underlying trend has been weak, and events abroad have tended to boost a number of other currencies (EUR, CAD, EM, and GBP).  These trends have tended to spread to broader USD weakness and may yet resume to drag down or cap the USD.  (Stronger growth and likely taper in Europe, hikes in CAD, and likely soon in GBP, stronger global growth, boosting EM).

To keep the USD rising, we may need more positive news on tax reform.

Key points from FOMC

The median dot-plots for rates have not changed for the next two years.

A hike in December has 11 votes, 4 voted for no change, one member has two more hikes this year.

This is no change in the number of votes for no further rate hike this year (4) made in June.  So it suggests no additional ambivalence on the outlook for this year. On the very near term, this firms up the odds they go again this year in December.

The median projection for rates is for three hikes next year to 2.125.

The median projection for 1019 is down from 2.9 to 2.7%.

They have added in a forecast for 2020 for the first time, and the median forecast is for 2.9%.

The long-run neutral rate median forecast has been lowered from 3.0% to 2.8%.

The forecast for unemployment in the next two years has been lowered from 4.2% to 4.1%.  But the long run neutral rate median forecast is unchanged at 4.6%. So the Fed sees some additional labor market tightening.

They have raised the forecast for GDP this year from 2.2% in June to 2.4%.  This and their statement suggests they expect the rebuilding phase for the hurricanes will be well underway this year.

The GDP forecast for 2019 is unchanged at 2.1%; it has been raised a bit from 1.9 to 2.0% in 2019.

The long-run neutral rate of GDP is still forecast at 1.8%.

The core inflation forecast has been revised down for this year from 1.7 to 1.5%.

The core inflation forecast for next year has also been revised down a bit from 2.0% to 1.9%.

In 2019 onwards the forecasts remain at the Fed’s target of 2.0%.


The 2yr swap rate is up around 5.5bp since the FOMC, up 3.8bp since the previous NY-close

The 10-year Treasury yield is up around 4bp since the FOMC, up 3.2bp since the previous NY-close


The statement said, “Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

The Yellen Press conference opening statement said, “Based on past experience, these effects are unlikely to materially alter the course of the national economy beyond the next couple of quarters.”

On the QT, the statement said simply:

“In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans”

Other than that was little change in the statement.

The Yellen press conference opening statement said:

“As we expected, and smoothing through some variation from quarter to quarter, economic activity has been rising moderately so far this year. Household spending has been supported by ongoing strength in the job market. Business investment has picked up, and exports have shown greater strength this year, in part reflecting improved economic conditions abroad. Overall, we expect that the economy will continue to expand at a moderate pace over the next few years.”

The Fed still sees the recent fall in inflation as largely temporary.  Yellen said,

“However, we believe this year’s shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one-off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory. Such developments are not uncommon and, as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away.”

However, she conceded:

“Nonetheless, our understanding of the forces driving inflation is imperfect, and in light of the unexpected lower inflation readings this year, the Committee is monitoring inflation developments closely.”

This is consistent with the FOMC statement that has said since June that “Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”

The Fed statements nowhere mentions fiscal policy.  So it assumes these forecasts do not incorporate the possible impact of any tax reform.