Clear Consensus for a March Pause, Mixed Views on Possibly Altering Runoff

Last week featured communications from FOMC participants—most importantly the December FOMC minutes and public remarks from Powell and Clarida—that signaled quite clearly that the FOMC is inclined to put rate hikes on hold at the March FOMC meeting. 

The December 2018 FOMC minutes revealed a greater shift in the mood of FOMC participants than had been apparent in Powell’s remarks at his postmeeting press conference. While the baseline forecast was little changed, as Powell emphasized in his press conference, and there was still a consensus that further tightening would be appropriate, FOMC participants were clearly uneasy about the downside risks that have preoccupied financial markets. Given the still-muted inflation outlook, FOMC participants can be “patient” as they wait for the data to confirm that some further tightening is warranted. The minutes also appeared to indicate more openness among FOMC participants to changing the parameters of runoff policy than indicated by Powell’s firmness at his press conference. Click here for the full analysis. 

Other than the December 2018 FOMC minutes, the most important Fed communications came from Powell and Clarida. Powell sounded quite confident about the economic outlook in his remarks, but he seemed to confirm the impression given by the December FOMC minutes about the prospects of a March hike (Jan. 10).  When he was asked specifically about the prospect of a hike in the near term, he emphasized the FOMC’s  ability to be “patient,” given the muted inflation outlook: “You should anticipate that we’re going to be patient,  and watching, and waiting, and seeing.” He said that he wanted to see the data confirm that the economy is on track in 2019 after a strong 2018. This response suggests that the FOMC will pause rate hikes at least through March, as this is a difficult condition to fulfill in just a couple more months. While Powell may continue to be quite confident that the economy remains on track at the March meeting, he simply won’t have enough data in hand for 2019 to confirm that. Downside risks call for a risk management approach, which,  in turn, calls for a pause in March. This reinforced our decision to drop our baseline of a March hike.  Commenting on balance sheet policy, as in his December press conference Powell did not indicate that a  near-term adjustment to runoff was under consideration. He said that the balance sheet will “be substantially  smaller than it is now…It will be smaller than it is now, but nowhere near where it was before.” Click here for the full analysis. 

Clarida’s wide-ranging speech (Jan. 11) was very dovish. He emphasized that “we can afford to be patient,”  the same language that Powell has been using. But he didn’t sound nearly as optimistic as Powell, expressing much greater concern about slowing global growth. His focus was overwhelmingly about downside risks,  with risk-management concerns calling for at least a delay in further rate hikes. He also expressed the concern  that “inflation has surprised to the downside recently, and it is not yet clear that inflation has moved back to  2 percent on a sustainable basis.” On balance sheet normalization, Clarida commented that “If we find that  the ongoing program…no longer promotes the achievement of our dual-mandate goals, we will not hesitate  to make changes.” He thought that a system of “abundant reserves” has served the FOMC well. Click here for our full analysis. 

In addition to Powell and Clarida, many other policymakers embraced the idea of patience—and implicitly a  March pause. Bostic (Jan. 9) saw a “patient approach” as “fully warranted.” He saw only one hike this year.  Rosengren (Jan. 9) thought that “Recent data from China’s economy, the potential for increased trade  

tensions, and heightened volatility all counsel for policy to be both flexible and patient.” However, he was  hopeful that going into Q2 the incoming data might point to conditions that warrant more tightening: “My  best guess is that we won’t see that much of an impact [from volatility] and as we get into the second quarter  it will be clear that we’re continuing to grow at a little bit above 2% and that the unemployment rate is  declining.” Evans seemed to rule out a March hike completely, saying, “I think we do have the capacity to not adjust rates for some period of time” (Jan. 9) and “We can easily wait six months to kind of look at the data and see how things come in. I doubt there will be a lot of urgencies” (Jan. 10). Kashkari (Jan. 10) thought  “maybe we can just take it easy a little bit, see how the economy evolves before we continue raising interest  rates.” Bullard (Jan. 10) went furthest in the dovish direction: “We do have flexibility now that we’re off zero  to move the policy rate either up or down in response to economic conditions.” He also warned that further rate hikes could lead to a recession (Jan. 9). 

Several participants weighed in on-balance sheet policy. Discussing concerns about runoff, Evans (Jan.  10) said he interpreted market participants as saying “there’s a different dimensionality to liquidity provision and how they go about doing a bunch of things that maybe the balance-sheet runoff is interfering with. I  don’t know.” He said he didn’t know “exactly what level concerns about how the economy is performing  would have to rise to adjust” but that he is “certainly more open-minded.” He  continued to think that “changes in our policy interest rate instrument are going to be adequate for a while,  but it’s something to think about.” In contrast, Rosengren (Jan. 9) expressed a clear preference for keeping  balance sheet runoff “on autopilot.” For him, it would take a “dramatic slowdown” to change the balance sheet policy. Mester (Jan. 4) said that revisiting the runoff policy might be warranted if “things deteriorate.” However,  she said that “right now I don’t see any indication that we need to reconsider.” Bullard (Jan. 9) saw little reason to change runoff plans, noting that yields show little impact from runoff. 

Nowcasts (2018:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.8% 2.6% 2.7%
New York Fed Staff Nowcast 2.5% 2.5% 2.5%
CNBC/Moody’s Survey 2.9% 2.9% 2.9%

Recent Data 

A growing number of economic data releases have been postponed because of the ongoing partial government shutdown. In particular, the Department of Commerce, which contains the BEA and Census Bureau, remains closed. These agencies publish data on numerous areas of the economy, including trade, construction, retail sales, and manufacturing. The BLS is part of the Department of Labor, which remains open, and has continued to release data, including last week’s CPI for December. The headline CPI was soft, as expected, weighed down by a decline in energy prices. However, core prices were firmer, advancing a couple of tenths on growth in prices of both core goods and services.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
ISM Non-Manufacturing Index Dec 57.6 58.5 — 60.7
CPI MoM Dec -0.1% -0.1% — 0.0%
CPI YoY Dec 1.9% 1.9% — 2.2%
Core CPI MoM Dec 0.2% 0.2% — 0.2%
Core CPI YoY Dec 2.2% 2.2% — 2.2%

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