Cautious Optimism and Inflation Vigilance

The March FOMC minutes were consistent with both parts of our call, that there will be no further rate hikes and that, in the near term, there will be no rate cuts. The consensus among FOMC participants is clearly that there is little prospect of a need to tighten further arising in the near term. The minutes also reinforced our skepticism that the FOMC would raise rates in 2020, as the March median dots suggested. The minutes did not indicate that policymakers are inclined to “undo” some of the tightenings from last year by cutting rates in the near term. Click here for the full commentary. 

Policymaker Remarks 

In addition to the March FOMC minutes, several policymakers expressed support for the current “patient”  stance. The overall message appeared to be cautious optimism and continued vigilance about inflation. There was a consensus that some of the worries about a weaker global outlook have subsided, at least in part. Clarida (Apr. 11) was hopeful for improvement in the global growth picture later this year. He also highlighted the possibility that the range of plausible estimates of the NAIRU “likely extends at least as low as the current level of the unemployment rate” (Apr. 9).  

Evans (Apr. 15) repeated his projection for no rate hikes until late 2020 on account of inflation being “a little  bit lighter.” Weaker inflation data was an argument against “premature tightening.” In his speech, he  suggested a stronger commitment to improving inflation outcomes: “The Fed must be willing to embrace  inflation modestly above 2 percent 50 percent of the time.” He suggested 2.5% inflation as a possible  threshold: “Indeed, I would communicate comfort with core inflation rates of 2.5 percent, as long as there is  no obvious upward momentum and the path back toward 2 percent can be well managed.” While he expressed  hope for an optimistic outcome, he also noted that a softer outlook could mean “policy may have to be left  on hold — or perhaps even loosened.”  

Williams (Apr. 11) was concerned that inflation being persistently below target could erode inflation expectations as well. He said worries of a greater-than-expected slowing in the economy “have receded somewhat” since last quarter. He saw the flat yield curve as a portent of lower interest rates rather than a  recession. Brainard (Apr. 11) noted the importance of anchoring inflation expectations at 2% and said the  FOMC’s current policy stance was intended to help achieve that. She saw growth as exceeding potential, but only slightly, and saw downside risks. Bullard (Apr. 11) seemed in accord with the patient’s posture. Kashkari  (Apr. 11) reiterated his preference for avoiding a restrictive stance, and he thought the current funds’ rate was close to neutral. He thought there was still slack in the labor market.  

Bullard opposed maintaining the “patient” wording in the post-meeting statement, instead preferring more neutral language that didn’t necessarily suggest a normalization program. Such a wording change was also discussed at the March meeting, although no decisions were made. He also cast doubt on depending on the  Phillips curve: “It is no longer enough to merely cite strong labor markets and simply assert that inflation must  

be around the corner.” Kashkari echoed a similar argument, instead preferring wage growth as a better gauge of maximum employment. 

Additionally, Chairman Powell addressed a U.S. Democratic Party retreat last week. He was reported to have reiterated that current interest rates are appropriate and that the U.S. outlook is affected by an economic slowdown abroad, notably in China. He also allegedly said that the slowdown in Europe was more pronounced than the Fed anticipated. 

Nowcasts (2019:Q1) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.3% 2.3% 1.7%
New York Fed Staff Nowcast 1.4% 1.4% 1.3%
CNBC/Moody’s Survey 1.6% 1.6% 1.5%

Recent Data 

Core CPI prices posted only a modest gain in March. While producer prices and import prices, on the other hand, were somewhat firmer than the consensus, on balance it looks likely that the core PCE print for March will be quite modest. In the preliminary Michigan survey for April, the measure of longer-term inflation expectations returned to its all-time low of 2.3%, where it was as recently in February, from 2.5% in March.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Factory Orders MoM Feb -0.5% -0.5% 0.0% 0.1%
Durable Goods Orders MoM Feb F -1.6% -1.6% — -1.6%
Core Capital Goods Orders MoM Feb F -0.1% — — -0.1%
Core Capital Goods Shipments MoM Feb F -0.1% — — 0.0%
Core CPI MoM Mar 0.1% 0.2% — 0.1%
Core CPI YoY Mar 2.0% 2.1% — 2.1%
CPI MoM Mar 0.4% 0.4% — 0.2%
CPI YoY Mar 1.9% 1.8% — 1.5%
PPI Final Demand MoM Mar 0.6% 0.3% — 0.1%
PPI Final Demand YoY Mar 2.2% 1.9% — 1.9%
Core PPI MoM Mar 0.3% 0.2% — 0.1%
Core PPI YoY Mar 2.4% 2.4% — 2.5%
Import Price Index MoM Mar 0.6% 0.4% 1.0% 0.6%
Import Price Index YoY Mar 0.0% -0.6% -0.8% -1.3%

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