Policymakers Begin to Comment on the March Shift

The macro and rates projections from the March FOMC meeting were marked down substantially, confirming the dovish shift since the December meeting that contributed to our call that there will be no further rate hikes (click here for our analysis). Following the meeting, several individual policymakers expressed their support for the new policy posture. However, many of them were already advocating a prolonged pause before the March meeting, so for these policymakers, their current comments do not necessarily represent a  dovish shift. 

Bullard (Mar. 22) saw no reason to change the fund’s rate in either direction. He was hopeful any weakness would be temporary and recede by Q2. Commenting on the yield curve inversion that occurred last week, he said that an inversion would concern him if it lasted more than several days and exceeded a few basis points.  Evans (Mar. 24) noted that the secular decline in long-term interest rates meant that yield curves would be naturally flatter than in previous episodes, which means a smaller move in yields can lead to an inversion. He also thought that downside risks appeared to exceed upside risks for the moment. He warned that continued  weakness in inflation or inflation expectations could prompt a lengthy pause in the fund’s rate or cause the policy  to be “perhaps even loosened.” Nonetheless, he revealed that his projected path still included a rate hike in late 2020. Kashkari (Mar. 22) noted that monetary policy works with a lag. He had been advocating a more patient stance for a while. His estimate of neutral appeared to be 2.5%, but he suggested that it could be lower, citing yield curve flatness as a signal. Harker (Mar. 25) saw the neutral rate as still being one or two hikes away. Bostic (Mar. 22) warned that FOMC patience should not be interpreted as a “definitive signal”  that the funds rate must stay on hold for the rest of the year under all circumstances. Be that as it may, the movement of the median 2019 SEP projection to no hikes serves as a strong indication of a prolonged pause,  in our view. 

Additionally, President Trump nominated Stephen Moore for one of the two current Fed governor vacancies.  In a television interview, Moore said he had no intention of disrupting Chairman Powell’s leadership concerning policy. He agreed with the current concern over disinflation. One divergence with general FOMC  thinking is Moore’s belief that U.S. growth would be maintained at 3-4% for the next several years, which is a view that is clearly not shared by FOMC participants. 

The limited incoming data last week contained a couple of positives for Q1 real GDP growth, though it still appears likely to be quite soft. Existing home sales and wholesale inventories posted strong, well-above consensus gains in February and January, respectively. The pickup in core capital goods orders and shipments in January previously revealed in the advance report was confirmed in the full report released last week. 

Nowcasts (2019:Q1) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.2% 0.4% 0.5%
New York Fed Staff Nowcast 1.3% 1.4% 1.4%
CNBC/Moody’s Survey 1.4% 1.4% 1.0%

Recent Data 

Release Period Actual Consensus Revision to Previous  ReleasePreviously Released  Figure
Core Capital Goods Orders  MoMJan F 0.8% 0.8% — 0.8%
Core Capital Goods  Shipments MoMJan F 0.8% — — 0.8%
Wholesale Inventories MoM Jan 1.2% 0.1% — 1.1%
Existing Home Sales MoM Feb 11.8% 3.2% -1.4% -1.2%

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