As we wrote last week, the March FOMC statement, macro projections, dots, and press conference together showed an FOMC that has clearly become more optimistic about the outlook. (See our notes on the statement and projections and the press conference.) The revisions in the latest projections brought their macro outlook much more in line with ours. The FOMC median projection for core inflation now shows an overshoot of the 2% objective, though that one-tenth overshoot in 2019 and 2020 is smaller than what we expect.
While market moves following the conclusion of the March FOMC meeting on Wednesday were fairly muted, that was not the case the next day after the Trump administration announced 25 percent tariffs on at least $50 billion in Chinese imports and new restrictions on Chinese investment in U.S. companies. The S&P 500 fell more than two percent on both Thursday and Friday. Chairman Powell was asked several questions about trade at his press conference on Wednesday but avoided discussing how FOMC participants might respond to potential actions. He said “that there’s no thought, I think, that changes in trade policy should have any effect on the current outlook.” However, he also noted that it appears to have become more prominent as a risk to the outlook: “a number of participants reported in, about their conversations with business leaders around the country and reported that trade policy has become a concern going forward for that group.”
Several FOMC participants made public comments after the March meeting. Both Presidents Bostic and Kaplan revealed that their dots were at three hikes in 2018 (3/23). Kaplan remarked that “The fact that we can forecast a level a bit above 2 percent, I think just reinforces in my mind that the goal is a symmetrical goal.” Bostic suggested his estimate of the neutral funds rate is between 2¼ percent and 2¾ percent, to the lower side of FOMC participants’ estimates. He suggested that, “Once we get to neutral, we should step back and take a look to see how the economy is performing.” He said that that point “is at least a year away from now and possibly more.” Kashkari (3/23) said he approved of the FOMC’s decision to raise the funds rate target at last week’s meeting, but retained his dovish stance: “Personally, I think we have a ways to go before we achieved our dual mandate objectives.” He said that the FOMC is now talking about the risks from a trade war, and he warned that the consequences of a “crisis of confidence” could be quite severe. Rosengren (3/23) gave a speech focused on how policymakers should respond in the next downturn, suggesting “this may be the time to focus on whether we have adequate buffers among the available policy tools – to be prepared, should anything disrupt the recent trajectory.” Finally, it was reported over the weekend that San Francisco Fed President John Williams is the frontrunner to follow Dudley as New York Fed president.
The incoming data last week drew less attention than developments on the policy front. The advance durable goods report for February was a nice positive surprise. Core shipments continued to grow, and core orders, which had appeared to flatten out over the last few months, posted a strong 1.8% gain.