FOMC Participants Patient But Still Hopeful

Last week’s communications from FOMC participants—the last remarks before the blackout period ahead of the January FOMC meeting—reinforced the message that policymakers are inclined to put rate hikes on hold through the March FOMC meeting. However, while policymakers saw increased downside risks, they generally remained fundamentally optimistic about U.S. economic prospects. Additionally, a new report from Bloomberg indicated that the White House is considering additional candidates for the two currently vacant Fed Governor positions. Nellie Liang withdrew herself for consideration for one seat, and it is uncertain whether the White  House will re-nominate Marvin Goodfriend for the other. 

Williams’ remarks (Jan. 18) appear to be representative of the balance the FOMC is striking between its optimism about economic fundamentals and caution because of perceptions of slower global growth and increased downside risks against a backdrop of muted inflation (see our note). Williams’ message was in line with recent remarks from a range of other policymakers as well as the minutes. His comments were full of dovish language, with great emphasis on caution and data dependency (“The approach we need is one of prudence, patience, and good judgment. The motto of ‘data dependence’ is more relevant than ever.”). Other remarks from FOMC participants included similar language. Clarida (Jan. 14) argued that the FOMC “can  afford to be very patient.” Evans thought the policy was “at a good point for pausing” and “we can easily be  patient.” Brainard (Jan. 18) likewise signaled she would support a pause: “We have that capacity to sit back  and carefully watch how the economy reacts to some of this uncertainty and be in a position to be able to  provide that stabilizing force.” George (Jan. 15) said it might be a “good time to pause.” As she will be an  FOMC voter this year, this comment was a strong signal that she would not dissent in response to a decision to pause in March. She is reputed to the most hawkish FOMC participant, so this shift underscores the strength of the consensus for a pause. Kaplan suggested that patience meant waiting “a quarter or two”  (Jan. 15). Kashkari (Jan. 16) suggested maximum employment has not been reached yet, and that that condition must be met for him to support a further hike. 

FOMC participants commented a good deal on downside risks, which explain the shift in the FOMC’s posture.  Discussing risks including those associated with the U.S. government shutdown, U.S.-China trade tension, and  Brexit, Brainard said, “all of those things are risks that if they were to materialize would be negative for the  economy, we’re not seeing as much risk out there that would be a positive surprise.” She warned, “the longer  these drag on the more I worry that they really materially weigh on consumer confidence, business  confidence.” Evans thought those risks “might weaken [his] outlook by a few tenths of a percentage point.”  Williams thought the impact of the shutdown on Q1 growth could be “up to a half percentage, or maybe even  a percentage point if it continues.” But he also saw the economic hit of a relatively brief shut down being  made up later: “The good news is that when the shutdown ends if it’s like in the past, the people will get  paid whether they worked or not, and then we will see a rebound in GDP after that.” 

Despite all the dovish messaging, there still appears to be a good amount of economic optimism. Quarles noted that he still has a “very strong” base case (Jan. 17). He saw global concerns as the culprit for recent  market volatility, but thought that those concerns might well be overdone, noting, “Certainly you can see a  narrative where that recent data [on global growth] are results of transitory factors and that we could get to  the other side of that.” Brainard said the labor market was “extremely healthy” and “the U.S. consumer has  

been pretty resilient” (Jan. 19). Evans (Jan. 17) said he “wouldn’t be surprised” if, at the end of 2019, the fund’s rate is “a little bit higher” than now. He said he penciled in three hikes for 2019 and no hikes in 2020, but he saw two or fewer hikes in 2019 as “plausible.” He cited the risk of making a (hawkish) mistake and hinted at a need to get core inflation above 2% to demonstrate the symmetric nature of the inflation objective. 

There were also some comments on balance sheet policy, though participants generally didn’t say much beyond reiterating the message that, “if circumstances change, I will reassess our choices regarding monetary policy, including the path of balance sheet normalization. Data dependence applies to all that we do” (Williams,  Jan. 18). Kaplan likewise expressed openness to revisiting the runoff plans. George was open to the idea that  balance sheet runoff might have a role to play in a return of greater volatility, saying, “I think that would be  a fair explanation.” She was also open to considering changing the caps on runoff but said, “I don’t know that we’re there now. I don’t know that that’s required at this point.” She said that “no decision’s been made” on whether to maintain the current system of abundant reserves, but she appeared to be leaning toward it. As for the composition of the Fed’s Treasuries portfolio, she favored “one that mirrors the structure  for the market.” She didn’t want the Fed to be in the “credit allocation business” and expressed unease with the Fed’s MBS holdings, which suggests she may favor MBS sales in the years ahead. She also hinted at her  views on the relationship between balance sheet and rate policies when she said, “you don’t want two  instruments competing at any given meeting.” 

Nowcasts (2018:Q4) 

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

Recent Data

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
PPI Final Demand MoM Dec -0.2% -0.1% — 0.1%
PPI Final Demand YoY Dec 2.5% 2.5% — 2.5%
Core PPI MoM Dec -0.1% 0.2% — 0.3%
Core PPI YoY Dec 2.7% 2.9% — 2.7%
Import Price Index MoM Dec -1.0% -1.3% -1.9% -1.6%
Import Price Index YoY Dec -0.6% -0.8% 0.5% 0.7%
Nonpetroleum Import Price Index MoM Dec 0.3% 0.0% 0.0% -0.3%
Industrial Production MoM Dec 0.3% 0.2% 0.4% 0.6%
Capacity Utilization Dec 78.7% 78.5% 78.6% 78.5%
Manufacturing (SIC) Production Dec 1.1% 0.3% 0.1% 0.0%
U. of Mich. Sentiment Jan P 90.7 96.8 — 98.3
U. of Mich. 5-10 Yr Inflation Jan P 2.6% — — 2.5%

The Department of Commerce, which contains the BEA and Census Bureau, remains closed because of the ongoing partial government shutdown. The December retail sales report, which had been scheduled for release last week, was postponed as a result. 

The preliminary results of the University of Michigan survey for January showed a sharp decline in the consumer sentiment index, which had been stable at very high levels even though the Q4 volatility in equity markets. The decline in the overall index reflected more pessimistic assessments of both current and expected economic conditions, with respondents citing a range of factors including the partial government shutdown,  the impact of tariffs, and instabilities in financial markets. Consumer spending and sentiment have held up surprisingly well to this point, and this print adds even greater significance to the forthcoming data, which will reveal whether and to what extent consumers are more restrained in actual spending decisions. 

The BLS is part of the Department of Labor, which remains open, and has continued to release data, including last week’s PPI and import price data for December. The core PPI for December was somewhat soft relative to expectations, edging down slightly. Core import prices were somewhat firmer than expected, posting a  moderate gain. The headline figures for both indices declined, pulled down by lower energy prices. 

Industrial production data for December came in somewhat stronger than expected, increasing 0.3% despite weakness in utility output. Manufacturing posted a very strong 1.1% gain in December. That’s particularly significant given the recent weaker ISM print for December and questions about the outlook for business investment. However, that gain represented a bounce-back following several modest readings and does little to clarify the outlook. 

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