Data Provide Some Relief Without Threatening the FOMC’s Patient Stance

Last week’s incoming economic data, most notably March retail sales, led to upward revisions to estimates of U.S. real GDP growth in Q1. The stronger U.S. data, as well as some more optimistic data for the Chinese economy, have been accompanied by an improvement in sentiment and a sense that downside risks to the global growth outlook are perhaps not as severe as they had appeared. While policymakers expressed some relief at these developments, there was no indication of a shift away from policymakers’ patient policy stance.  Policymakers reiterated that their focus is on too-low inflation and that they see little reason to tighten further until the inflation picture changes. 

Policymaker Remarks 

Several policymakers speaking last week reiterated their disinclination to raise rates. Evans wished to see actual evidence of inflation moving up. Rosengren noted that P/E ratios were “a little bit rich” but even  so said, “I’m not going to take a really significant action to slow down the economy when I’m not even hitting  my inflation target.” He wanted more “convincing” evidence of sustained 2% inflation. Bostic (Apr. 18) said  the current fund’s rate is “close to neutral now if not there.” Bullard (Apr. 17) saw unemployment persisting below 4% as evidence of the absence of an “active” Phillips curve. Kaplan (Apr. 18) said “For the time being  I don’t see any reason to have any change in our policy setting,” even though he was “getting a little bit more  confident about economic growth this year.” In particular, he pointed to reduced concern about the economic outlook for China. Harker was skeptical inflation would motivate an imminent policy move: “I am not seeing inflation accelerating quickly. It could. I am not saying it couldn’t. But right now, I don’t see why we would  make a significant move.” But he maintained his policy call of “at most” one hike each in 2019 and 2020.  He saw unemployment falling to the 3.5% range before rising a few tenths.  

Although there was little explicit news on progress with the monetary policy framework, several policymakers shared their suggestions, even going so far as to discuss conditions that would lead them to ease policy.  Evans (Apr. 15) proposed a more explicit commitment to making up past inflation misses: “To fix this problem,  I think the Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time.” In  terms of policy communications, he “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.”  He also hypothesized that 1.5% inflation could motivate rate easing: “If core inflation were to move down to, let’s just say, 1.5 percent, that’s below our 2 percent…It’s certainly below what I would say is symmetry.  So, I would assume that means that our setting of the fund’s rate is actually restrictive in holding back inflation,  and so that would naturally call for a lower funds rate.” He thought that would amount to “taking out  insurance.” Clarida has also cited the concept of “insurance cuts.” Kaplan (Apr. 18) saw inflation at 1.5% or  below as “something I’m going to certainly take into account” in setting rates. Rosengren (Apr. 15) stated  his preference for “the Federal Reserve to adopt an inflation range that explicitly recognizes the challenge of  the effective lower bound.” He explained: “We might be forced to accept below-2-percent inflation during  

recessions, but we would commit to achieving above-2-percent inflation in good times, to provide more policy space to counteract the next recession.” Harker (Apr. 17) described himself as focusing on the  “medium-term average” of inflation: “I see inflation averaging slightly higher than 2 percent this year and next. Again, my focus is on the medium-term average, and what I’m watching, in particular, is inflation’s  trajectory — that is, not just its direction, but the speed at which it travels.” 

Nowcasts (2019:Q1) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.8% 2.3% 2.3%
New York Fed Staff Nowcast 1.4% 1.4% 1.4%
CNBC/Moody’s Survey 2.4% 1.6% 1.6%

Recent Data 

Estimates of real GDP growth in Q1 have moved up in recent weeks, and it now appears that real GDP growth was likely faster in Q1 than in the previous quarter. However, much of the positive surprises have been in those components outside of final private demand, namely net exports, inventory investment, and government. Last week, the trade balance was reported to have narrowed in February, in contrast to the consensus expectation of a widening, pointing to a substantial positive contribution of net exports to real  GDP growth in Q1. It still appears that final private demand growth slowed sharply in Q1. That makes last week’s retail sales report for March particularly important. Sales in the control group—which includes only those categories of retail sales that are direct inputs into the PCE data—advanced 1.0% in March after declining in February. While real PCE growth still appears likely to be significantly slower in Q1 compared to recent quarters, that strong reading points to a return to solid consumer spending growth in Q2. Other data released last week were less sanguine. Industrial production was soft in March, edging down a tenth. And the housing data remained lackluster as well, with both starts and permits data declining further in March.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Industrial Production MoM Mar -0.1% 0.2% 0.1% 0.1%
Manufacturing (SIC) Production MoM Mar 0.0% 0.1% -0.3% -0.4%
Capacity Utilization Mar 78.8% 79.2% 79.0% 78.2%
Trade Balance Feb -$49.4b -$53.4b — -$51.1b
Wholesale Inventories MoM Feb 0.2% 0.3% — 1.2%
Retail Sales Advance MoM Mar 1.6% 1.0% — -0.2%
Retail Sales Control Group MoM Mar 1.0% 0.4% -0.3% -0.2%
Business Inventories MoM Feb 0.3% 0.3% 0.9% 0.8%
Housing Starts MoM Mar -0.3% 5.4% -12.0% -8.7%
Building Permits MoM Mar -1.7% 0.7% -2.0% -1.6%

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