March Hike A Close Call as Policymakers Stress Ability to Be Patient

Last week featured mixed economic data and significant comments from FOMC participants, most importantly  Chair Powell (our note here). The renewed emphasis on the FOMC’s ability to be patient makes March a very close call and imparts added significance to upcoming Fed communications and incoming data. 

The ISM manufacturing composite index declined significantly in December, and markets sold off as the release reinforced concerns that the U.S. economy might be experiencing a substantial weakening not yet apparent in most of the data in hand. Disappointing corporate earnings news added to concerns about a global slowdown in economic activity. However, markets later rallied following the strong December jobs report (see our note) and remarks from Powell that were dovish overall. The rally continues today, supported by optimism about resumed U.S.-China trade talks. Payrolls surprised well to the upside, increasing 312K in December,  and average hourly earnings posted a solid gain that raised the 12-month change to 3.2%. The two-tenth rise in the unemployment rate, to 3.9%, is no concern as it was accompanied by a two-tenth rise in the participation rate. In his remarks on Friday, as in his December press conference, Powell emphasized that the  U.S. economy was strong in 2018. He cited the December employment report released on Friday as further evidence of this. As for December ISM, he acknowledged that “the fact that it moved down so much in one  month is something worth keeping an eye on” but stressed that it declined from very high levels to a level  that is still “consistent with ongoing moderate growth.” 

At his December press conference, Powell had emphasized how little-changed and strong the outlook was,  appearing somewhat dismissive of market concerns about downside risks. On Friday, while he reiterated said the U.S. economy appears to have good momentum, he gave the market what it wanted to hear by emphasizing the FOMC’s ability to be patient concerning tightening as it assesses the downside risks preoccupying markets. He suggested that the FOMC is willing to reconsider and change policy, abruptly if necessary. He also departed clearly from his previous remarks on balance sheet policy, expressing openness to adjust the normalization plans rather than repeating that the FOMC sees no reason to take those plans off autopilot. 

Several other policymakers echoed Powell’s change in sentiment. Mester (Jan. 4) noted that “One or  two rate hikes is about where we are seeing the economy now…I don’t feel an urgency to increase rates  from where we are now.” She added, “I want to take the time I have to actually evaluate how the economy  is going.” Like Powell, she said that the FOMC “always left open” the option to change runoff policy if the  outlook deteriorates and noted that “if the economy deteriorates in a way that necessitates changing that  plan, we are willing to do it.” Kaplan (Jan. 3), too, appeared more willing than before to consider changing runoff policy. He was “very open, if necessary, to making adjustments to this balance sheet runoff if we need  to.” He counseled patience on the rate path, and preferred forgoing rate hikes at least during the first half: “I  would be an advocate of taking no action. For example, in the first couple of quarters of this year, if you  asked me my base case, my base case would take no action at all.” Bostic (Jan. 4) warned that “we are  now in uncharted territory” concerning the balance sheet, so “we want to take small steps.” 

At the AEA conference at which Powell also spoke, Williams (Jan. 5) presented research on alternative monetary policy frameworks. He found that average-inflation targeting or price-level targeting could help  counter excessively low inflation expectations: “a dynamic strategy such as price-level targeting that raises  

inflation expectations when inflation is low can both anchor expectations at the target level and potentially  further reduce the effects of the lower bound on the economy.” Given his longtime focus on issues relating to monetary policy strategy, Williams will be an influential policymaker this year as the Fed conducts a review of its monetary policy strategy.  

Nowcasts (2018:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.6% 2.7% 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 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
ISM Manufacturing Dec 54.1 57.5 — 59.3
Wards Total Vehicle Sales Dec 17.50m 17.24m — 17.40m
Change in Nonfarm Payrolls Dec 312k 184k 176k 155k
Unemployment Rate Dec 3.9% 3.7% — 3.7%
Average Hourly Earnings MoM Dec 0.4% 0.3% — 0.2%
Average Hourly Earnings YoY Dec 3.2% 3.0% — 3.1%
Average Weekly Hours All Employees Dec 34.5 34.5 — 34.4
Labor Force Participation Rate Dec 63.1% — — 62.9%

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