FOMC Quick Take -upgrade to forecasts, but sets a suck it and see tone

Posted on March 22nd, 2018

FOMC raised GDP forecasts for 2018 from 2.5 to 2.7; for 2019 from 2.1% to 2.4%.  However, it left the 2020 GDP forecast at 2.0%, and the long run potential rate at 1.8%.

It lowered unemployment rate forecasts across the profile from 2018 to 2020. From 3.9 t0 3.8% in 2018, from 3.9 to 3.6% in 2019, and 4.0 to 3.6% in 2020.

They lowered the neutral unemployment rate from 4.6% to 4.5%.  With unemployment expected to remain and fall well below this level over the forecast horizon.

PCE inflation forecast largely unchanged, but rising a bit above the target to 2.1% in 2020. Remaining at 1.9% this year, 2.0% next year and 2.1% in 2020

Core PCE inflation has been revised up a tick to 2.1% in both 2019 and 2020, just above the 2.0% target.

The median interest rate projection is still at 2.1% this year (three hikes in total), but there is a clear leaning in the dots towards 4 hikes. Virtually and even split.

The median rate projection has been lifted in 2019 from 2.7% to 2.9%.  And from 3.1% to 3.4% in 2020.

The long-run neutral Fed funds rate has been raised a bit from 2.8% to 2.9%


The statement had the same crucial elements:

“Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

“Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely”.

The March statement acknowledged that recent economic activity had slowed from a rapid Q4, describing it as “moderate”, down from “solid” in the January statement.

However, it upgraded its outlook adding to its March statement: “The economic outlook has strengthened in recent months.”


Powell sets a suck it and see tone

Powell dodged saying too much in the press conference that might be controversial.  He commented that feedback from business leaders is that they are concerned by tariffs, but suggested they had little impact on the Fed’s decision.

He described the inflation mandate as neutral in that the Fed is always striving for 2%, but did not give the impression that the Fed will have increased tolerance for above 2.0% in coming years just because it has been below for several years.  A somewhat hawkish assessment, pushing back on the notion of price level path targeting.

The USD is broadly weaker since the FOMC statement and during the press conference.

After an initial rise in yields and equity prices, they have retreated and are modestly lower on the day.

It is hard to say there is a reason in this statement for a weaker USD or lower US yields.

My initial thoughts were that the stronger forecasts and higher rate dot points should help support the USD.  However, this is probably not too far from what may have been expected.

I’d assess that the market is displaying volatility that may reflect some reversal of recent moves and thus position squaring, throwing the USD back into recent ranges

If there was a tone set by Powell it was that he reminded the market that the forecasts and dot points are highly uncertain, especially the further you move out, and the FOMC will react to the developments as they occur.

For instance, he noted the great uncertainty over the full-employment unemployment rate (4.5%). If the labor market is tight you would expect wages to eventually start to rise. At this stage there is not much sign that wages are moving up.  But if they do, then the Fed would respond.

This suggests that the Fed under Powell will be more likely to wait to actually see a pick-up in inflation before responding rather than relying on projections and pre-empting inflation.

He de-emphasized the forecasts, and perhaps this contributed to a weaker USD response, in that the dot-plot may point to more hikes, but the FOMC may deviate significantly if conditions do not proceed as expected.

This is hardly different or ground-breaking, but it gave the market the go-ahead to move away from the forecasts, and the market is still biased towards the Fed delivering less not more hikes.