Ok, here comes the main event.
There’s been so much written about this over the past two weeks that it would be impossible to try and summarize it (some recent posts here and here and here), but the bottom line is that all eyes are first and foremost on the median 2018 dot (four or three?). Then there’s the growth outlook in the SEP (upward revision and by how much?) and the unemployment forecast (downward revision?). The statement will be parsed for the extent to which it aligns with or is designed to partially offset the new forecasts and also for what it says about the balance of risks. More simply: where is the “headwinds become tailwinds” meme going to show up more clearly? In the statement or in the SEP?
The presser will be a crap shoot as no one knows how effective a market whisperer Powell is going to turn out to be. Key here will be how aggressive he is at reinforcing the message from his first day of testimony on Capitol Hill late last month. There may be some questions about the tariffs, which should be interesting – how do you balance out the myriad unknowns there with the expected economic sugar high from fiscal stimulus and won’t both the stimulus and the tariffs prove inflationary?
Here’s an annotated dollar chart with notable Fed-related news although this is practically worthless because the dollar is pulled in all directions by all manner of shit, some of which has nothing to do with the Fed:
This is probably critical in the decision calculus for the committee:
As one analyst we spoke to this afternoon put it, “in the light of recent discussions about flatteners, the Fed probably doesn’t want to be a cause of further flattening.”
Morgan Stanley’s Matthew Hornbach told Bloomberg TV that he expects the curve to “achieve complete flatness at some point later this year.” I’m not sure “achieve” is the best word there, but you get the point.
Of course the equities charts are funny because while the proximate cause for the correction was rapidly rising yields flipping the stock-bond return correlation positive (i.e. a tantrum) and then the entire situation being exacerbated by the VIX ETP implosion and some $200 billion in subsequent deleveraging by systematic strats, if you didn’t know any of that you’d think people just said “fuck it” as soon as Janet left:
So without further ado, here are the bullet point highlights, red line, dots, and projections.
- FED RAISES RATES QUARTER POINT, SIGNALS TWO MORE HIKES IN 2018
- FED ESTIMATES SHOW STEEPER PATH FOR RATE INCREASES IN 2019-20
- FED SAYS `ECONOMIC OUTLOOK HAS STRENGTHENED IN RECENT MONTHS’
- FED REPEATS NEAR-TERM RISKS `APPEAR ROUGHLY BALANCED’
In sum: three hikes projected in 2018, a steeper trajectory in 2019 and 2020, upward revisions to growth this year and next but long-run unchanged, lower unemployment trajectory across the board, and a modest inflation overshoot in 2020 on both headline and core (and in 2019 on core as well).
Dots
March
December
Projections
March
December
Statement
Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. 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.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Yada, Yada,Yadaaaaaaaaaaaaaa.
About those dot plots, Powell emphasized at his one and only presser (in March) that these are merely projection estimates. I’d add, bad estimates based on their track record. So don’t be hung up on them.