FOMC’s Wait-and-See Mode

We changed our monetary policy call last week. Our baseline no longer includes any further tightening, though,  for this year, we still see a hike as more likely than a cut. Beyond 2019, we continue to see an easing as more likely than a tightening. For a comprehensive explanation of our new call, click here

Policymaker Remarks 

The Fed’s balance sheet continued to be an area of focus in FOMC participants’ public remarks. Harker (Feb.  7) expected a decision on the level of reserves (and hence the balance sheet) “in the relatively near future,”  after which the composition of the balance sheet would be considered. He signaled his support for a buffer to keep reserves above their minimum level, given the imprecision of estimates of that level. He cited a minimum reserves level of $1.2 trillion, plus a $100-billion buffer. These figures suggest an end to runoff as soon as the second half of this year. Bullard also saw the need to be careful about approaching the minimum  level of reserves (Feb. 7), noting that this level will probably be “quite a bit higher than” what was thought  “even one or two years ago.” On whether the runoff caps will be tapered, he said he preferred an approach that wouldn’t disrupt the market. Daly (Feb. 8) said the FOMC was still deciding whether the balance sheet would be a regular tool of monetary policy or remain an emergency tool. She also said the FOMC has not yet resolved the question of whether to taper runoff caps. Harker also mentioned the possibility of a “reverse  Operation Twist” to provide the FOMC with the option to increase the duration of its portfolio in a future downturn. 

Many policymakers discussed the FOMC’s new wait-and-see attitude concerning further rate adjustments,  and they generally cited lengths of time such as six months or the next few quarters. Bullard warned that inflation expectations indicators have been on the softer side. He thought the normalization program has been  “sufficiently preemptive” to contain upside inflation risk. Mester’s baseline outlook prompted her to believe that the fund’s rate “may need” to move “a bit” higher than it is currently (Feb. 4). She warned that downside risks, such as China, could manifest and warrant a downward adjustment to her views. Quarles also shared the concern about spillovers from China to the U.S. (Feb. 6). But he also noted that the U.S. outlook is “still very solid,” citing the strong labor market and muted inflation pressures. He wanted to monitor global risks over “the course of the next six months,” a period which would extend through July. Quarles also noted that financial stability risks remained moderate, and said that there was no need to resort to using rates to counter asset bubbles because of the Fed’s other tools. Kaplan reiterated that the FOMC would be well served “if we paused and were patient for some number of months” (Feb. 7). He added that patience to him meant “one  to two quarters.” He saw a “reasonable prospect inflation forces are going to be muted.” Harker suggested the pause would last through the next few quarters. He disagreed with the decision to hike in December but saw one further hike in 2019 as appropriate. Daly thought that her “own sense of how many rate increases  we will need is lower,” but “exactly how many we will need is not clear right now.” She noted the need to  see how past rate hikes affect the economy, and shared recent concerns that inflation has not reached 2%  “sustainably.” Bowman, who is publicly commenting on monetary policy for the first time, said she is  “comfortable with the current stance of [FOMC] policy” (Feb. 11). 

Another temporary U.S. government shutdown is scheduled to begin Friday, Feb. 15, if U.S. lawmakers do not reach a consensus over border security. Daly warned that a second shutdown would be “much, much worse” than the first for confidence and sentiment. 

Nowcasts (2018:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.7% 2.5% 2.7%
New York Fed Staff Nowcast 2.4% 2.6% 2.6%
CNBC/Moody’s Survey 2.7% 2.7% 2.9%

Recent Data 

Last week’s incoming data had mixed implications for Q4 real GDP growth. The core capital goods data for  November were soft, little revised relative to the initial readings. On the other hand, the trade balance  narrowed sharply in November, pointing to less drag from net exports in Q4. 

Release Period Actual Consensus Revision to Previous Release Previously Released Figure
Core Capital Goods Orders MoM Nov F -0.6% -0.1% — -0.6%
Core Capital Goods Shipments MoM Nov F -0.2% 0.0% — -0.1%
ISM Non-Manufacturing Index Jan 56.7 57.1 58.0 57.6
Trade Balance Nov -$49.3b -$54.0b -$55.7b -$55.5b
Bloomberg Consumer Comfort 3-Feb 58.2 — — 57.4

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