A More Hawkish Package

The statement clearly revealed a more bullish view of the economic outlook. Accordingly, the dots moved in a more hawkish direction. Indeed, the movement in the dots was mostly in line with our expectations: The median dot remained at three in 2018, with the distribution shifting up toward four hikes this year and three hikes instead of only two in 2019. None of this changes our projected path for the fund’s rate—the FOMC is moving closer to its own rate projections. 

▪ As we expected, they characterized economic activity as having been growing at a “moderate” rate,  rather than “solid.” This downgrade, in the context of upward revisions to the forecast, reflects the apparently weaker-than-expected spending data for Q1. The statement describes household spending and business fixed investment as having “moderated from their strong” Q4 prints instead of describing gains as “solid” again. 

▪ The softer Q1 was downplayed with acknowledgments of strong labor market data.  ▪ In the second paragraph, a sentence was added to further downplay the softer Q1 spending data noted  in the first paragraph: “The economic outlook has strengthened in recent months.” This was also likely a  nod to changes in expectations of fiscal stimulus, which has become more certain and more substantial. ▪ Our guess of the statement had assumed that they would make note that inflation was firming. The  statement instead noted that inflation is now expected to move up “in coming months,” rather than “this  year.” We see this as delivering the same message in a slightly different manner. It’s also consistent with the expectation that 12-month inflation rates will move up in March, when the extremely weak March  2017 figures drop out of the calculation. 

But the macro and rate projections were the more important story, as they reinforced the message in the statement and aligned participants’ rate projections with the evolving forecast. Reflecting the stronger outlook for growth, the lower unemployment rate, and higher inflation, FOMC participants projected more rate hikes over the next few years. 

▪ The median 2018 dot remained unchanged at three hikes, as we anticipated. 

▪ However, the distribution of 2018 shifted up unambiguously. At this meeting, seven dots were above the three-hike median compared with only four in December. Another noteworthy development was the lack of any policymaker projecting two hikes. Ignoring the few dots at the extremes, the consensus is perfectly split between three hikes or four. The mean measure moved up.  

▪ The median 2019 dot rose from two hikes to three as anticipated. As a result, the fund’s rate at year-end  2020 now overshoots neutral by roughly two hikes. 

▪ The longer-run median dot edged up slightly as just enough participants moved up for the median to sit between 2.75% and 3.00%. We had been expecting such a shift at some point, although not as soon as at this meeting. We revised our own estimate up to 25 basis points as a result of the fiscal impulse, so this was not too surprising. 

As expected, the FOMC revised up their growth projections substantially. They also marked down the path of the unemployment rate and marked up projected core inflation. Core PCE inflation is now projected to overshoot the objective in 2019 and 2020; while we didn’t expect that to happen in this set of projections,  it’s a very reasonable expectation and has been a feature of our own forecast for quite a while. 

▪ The median FOMC projections for growth in 2018 and 2019 were revised up a total of five-tenths, as we expected, reflecting the incorporation of greater fiscal stimulus coming from the budget agreement. ▪ They had a tenth slower growth in 2018 and a tenth faster growth in 2019 relative to our expectations— an inconsequential difference. 

▪ The projected path of unemployment is only a tenth lower for 2018, but is much lower for 2019 and  2020, flattening out at 3.6%. 

▪ Those downward revisions—three tenths for 2019 and four-tenths for 2020—are larger than what the revisions to the growth projections would suggest based on Okun’s law. 

▪ It appears that this may reflect some catching up: The downward revisions to the unemployment rate in  December seemed small relative to the upward revisions to growth. 

▪ Whatever the case, there is now less tension between the unemployment rate and growth projections. ▪ The longer-run unemployment rate also edged down a tenth, which we’d seen as a possibility. A number of policymakers have commented that they had expected greater acceleration in wages by now. ▪ Core inflation is now projected to overshoot the two percent objective by a tenth in 2019 and 2020. ▪ We expected the median inflation projections to show an overshoot sometime soon, though not at this meeting. But the slight overshoot is consistent with an unemployment rate now projected to move quite a bit lower than in recent forecasts, now to 3.6% in 2019 and 2020, only a tick above our expectation of 3.5%. The overshoot of the 2% objective that has been a feature of our forecasts for some time has been motivated by a projected decline in the unemployment rate to such a low level. 

Projections of inflation and growth in the real gross domestic product (GDP) are for periods from the fourth quarter of the previous year to the fourth quarter of the year indicated. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

*LH Meyer forecast published March 16, 2018.

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