By now, you’ve presumably had time to digest the Fed hike, form your own opinion about the changes to the statement and draw conclusions about the shift in the dot plot.
Perhaps more importantly, you’ve likely come to some conclusion about whether Powell’s communication style (which he described on Wednesday as “plain English”) is more or less effective than the academic approach adopted by his predecessors.
Ol’ Jay underscored his optimistic outlook on the economy and he also announced that starting in January, he’ll be delivering his “plain English” assessments at every meeting, an effort he says doesn’t necessarily signal anything about policy, but which plainly means every meeting will be effectively “live”.
Oh, and he confirmed that Hindu Kush isn’t an input in the Fed’s decision calculus.
POWELL: MANDATE HAS NOTHING TO DO WITH MARIJUANA
— Walter White (@heisenbergrpt) June 13, 2018
For my part, I continue to believe Powell’s approach will prove dangerous at some point. He’s a non-economist doing an economist’s job. Period. When you throw in the fact that he’s tasked with unwinding the greatest experiment in the history of economics, you’ve got a recipe for mistakes. There’s more on that here.
Powell also seems confident that he can somehow manage what Jeff Gundlach described on Tuesday as a “suicide mission” – raising rates as the deficit balloons on the back of fiscal stimulus.
They’ll be a John Gotti moment at some point: “Five, ten years from now, they’re gonna miss Janet Yellen.”
When you consider Powell’s approach with the fact that this always – always – ends in tears for somebody, somewhere, you’ve got think that something’s going to break, whether it’s EM, the U.S. economy or something else.
The snap tighter in the curve following the Fed decision didn’t do much to calm the fears of those who insist that the shape of the curve is the best indicator for a looming downturn.
In any event, Wall Street, like you, has now had time to digest it all and weigh in. On the off chance you care what everyone is saying, I thought it was at least worth running through some short excerpts from the (much longer) notes out Wednesday evening.
The outcome of today’s meeting was close to our expectations but hawkish relative to market expectations, evidenced by the sell-off in the bond market after the release of the FOMC statement and Summary of Economic Projections at 2pm. Each piece of today’s meeting leaned somewhat hawkish. The FOMC statement upgraded the description of the economy, continued to describe the policy stance as “accommodative,” and made no mention of international economic or policy concerns. The economic projections upgraded both GDP growth and core inflation for 2018, with the latter now at the 2% target. The unemployment rate path fell just 0.1pp to bottom out at 3.5%, but the median estimate of NAIRU remained unchanged, implying a full 1pp overshoot. Although the range of NAIRU estimates fell by 0.1pp, Chairman Powell’s comment that NAIRU reflects slow-moving demographic variables implies limited appetite to reduce it further. The dots pulled forward the median path of rate hikes to show a 4-3-1 baseline over 2018-2020, from a 3-3-2 baseline in March. The median terminal (2020) and neutral rates were unchanged. Finally, Chairman Powell downplayed several concerns widely viewed in markets as reasons for a slower pace of rate hikes.
The Federal Open Market Committee raised rates 25bps at their June meeting, as expected. The summary of economic projections also shifted in a hawkish direction, indicating better growth and a slightly faster pace of hikes in 2018 and 2019. This suggests that recent strong domestic data and the upside risk from fiscal stimulus outweighed concerns about a flattening yield curve or sluggish growth abroad.
Overall, today’s meeting saw a slightly hawkish shift in Fed policy. This fits with recent strength in domestic data. Importantly though, the FOMC did not seem deterred by a number of emerging risks, including negative growth surprises in Europe and emerging markets, a flattening yield curve, and the threat of escalating trade restrictions. We continue to expect four total hikes in 2018, with the next two occurring in September and December. We also anticipate two further hikes in 2019.
For the FOMC, the way ahead for the funds rate is clear, with steady rate increases in 2018, 2019 and 2020. We are skeptical. Our outlook is that the FOMC has given us a very linear projection in the fed funds rate through 2020, while also pursuing shrinkage in its balance sheet. Given the recent increases in auto and credit card delinquency rates, there is evidence of growing financial strains on mid-to-lower-credit households that may weaken overall economic growth into 2020. Linear projections in a cyclical economy do not raise our level of confidence.
We expected that the committee would alter its statement of the stance of policy and, in the process, signal that policy is closer to neutral than before. The Fed has now executed a series of rate hikes and will lift the balance sheet cap sizes again in July and, in our view, it would have been appropriate to say that monetary policy is “modestly” or “somewhat” accommodative. However, the Fed repeated the assessment that monetary policy was accommodative. We read this as a hawkish outcome since it implies that the bar for further rate hikes is likely relatively low.
We see the move to press conferences following each meeting as making previous “nonpress conference” meetings only somewhat more live than before. In our view, what drives decisions during the quarterly meetings is the forecast process more than the press conferences themselves. Hence, while press conferences give the committee an ability to explain decisions at any given meeting, the act of revising the forecast and attaching an appropriate policy path to that forecast is likely the most important factor in why policy decisions are most often taken during meetings in March, June, September, and December.
The FOMC delivered what we interpret as a hawkish hike at its June meeting. The Committee made several changes to its statement, upgrading its assessment of economic activity and marking down the unemployment rate, in addition to modifying forward guidance to reflect a more neutral policy regime. Additionally, participants on balance lifted their projected hiking path, with the median participant now seeing two more rate hikes this year and three next. The FOMC is moving closer to a more neutral and flexible policy regime. We are now aligned with the Committee as we continue to expect the FOMC to deliver two more rate hikes this year. For 2019, we think the Fed may fall short of delivering its median projection of three hikes as we expect it to be nimble and quick to pause its rate hikes in the face of slower growth and greater uncertainty – something we expect to see clear signs of toward the middle of the year. On the other hand, a more positive outlook (ie, more sustained above-trend growth) would result in more hikes
As expected, the Committee revised the first paragraph on economic conditions to reflect the better economic data received since the March meeting. The language tilted a bit more hawkish as the Committee removed the language around inflation expectations remaining low. Elsewhere, the FOMC removed most of its forward guidance language suggesting that the federal funds rate will be at levels below the longer run. Also, they removed language around “carefully monitoring actual and expected inflation developments” as the Committee sees inflation nearing its 2% target. On balance, the changes in the statement leaned modestly hawkish in our view, ushering in a stance of policy that will start to shift towards neutral.
The rates market interpreted the FOMC statement as hawkish, with 2Y rates increasing 3 bps and 10Y rates increasing 1 bps. The market’s primary focus was on the increase in the Fed’s dot plot, with both the 2018 and 2019 median dots shifting higher by 25 bps. In addition, the Fed’s higher near-term forecasts for growth and inflation as well as a lower unemployment forecast furthered the hawkish messaging from the Fed. Overall, the Fed’s more hawkish stance is consistent with our existing views for a steeper fed funds curve, a flatter 5s30s curve, and higher overall level of rates.
A compilation of other quotables via Bloomberg
- Wells Capital Management (Jay Mueller)
- Fed statement “slightly more hawkish and bullish on the economy than what the market has built in. The ambiguity over whether they would raise rates three or four times this year seems to have been resolved in the direction of four, so it makes sense that the market has sold off and that the curve has flattened”
- “The upgrade to the qualitative description of the economy is also indicative of a more hawkish bias”
- Societe Generale (Subadra Rajappa)
- On the importance of additional press conferences: “Policy is still going to be very data-dependent, but we’re going to see the potential for probabilities of rate hikes to be more evenly distributed across the meetings. I think you’re going to see a bit more activity in futures contracts that trade around those dates”
- HSBC (Daragh Maher, note)
- The dollar rally, which stalled at the end of May, will be reinvigorated by the hawkish picture painted by the Fed
- “The USD is likely to appreciate most significantly against high beta G-10 currencies and EM FX, given that the market should recalibrate expectations for the tightening pace of the Fed”
- Pantheon Macroeconomics (Ian Shepherdson, note)
- “The Fed is moving towards the point where it believes it might have to be positively seeking to restrain growth. Policymakers are not there yet – at least, a substantial minority is not there yet – but the threat of unemployment continuing to fall to 50- or even 60-year lows is bringing the day nearer”
- MUFG (Chris Rupkey, note)
- “The rate hikes are not on autopilot, Powell says, but you sure could have fooled us”; “Slow and steady wins the race in the Fed’s mind as the path of rates is set in stone over the next few years. The economy isn’t hot enough to hike rates any faster and the economy isn’t cool enough to hike rates any slower”
- Expects another rate increase in September and again in December
- On additional press conferences: “we don’t know why they would bother, if they are only going to raise rates four times a year”; seems like “overkill”
- Vanguard (John Hollyer, note)
- Fed “sent a hawkish message”
- Forecast of two additional rate hikes this year further affirms “expected strengthening in the U.S. economy over the next two years”
- Dot plot suggests restrictive monetary policy “sooner rather than later, which could ultimately impact investors in riskier assets, including high yield bonds and equities, in addition to sustained near-term strength in the U.S. dollar”
- Sees “increased likelihood of a flatter yield curve”