The Statement: Removal of “Accommodative” Inconsequential
The FOMC removed entirely the “accommodative” language and did not replace it with anything. We had seen slightly better than even odds that they would retain this language, but we don’t see the decision to remove it at this time as consequential for the policy outlook. Powell’s remarks in his press conference support this interpretation: “I think if you look at the dot plot…the rate even after today’s move is below the [longer
run] estimate of every single participant who submits an estimate of that. That’s why this is the perfect time to take the language out because, you know, it’s perfectly clear that there can’t be a signal because, you know, by definition, that means an accommodative policy. It wasn’t because the policy is not accommodative. It is still accommodative. The thinking was more…that the language has run its useful life.” This was a further move toward reducing the role of the postmeeting statement in providing forward guidance. Other than that, the statement was unchanged.
As he has before, Powell avoided directly answering questions about the appropriate setting of monetary policy beyond the near term. He didn’t want to get into answering questions, even in the abstract, about the funds rate entering the restrictive territory, the fund’s rate possibly being cut at some point, and the path of the unemployment rate a couple of years out. He said, over and over, that the FOMC will make its decisions meeting by meeting based on the incoming data. We didn’t see much news in his remarks, but they did reinforce our skepticism that the Powell FOMC will be willing to raise rates in 2020. His argument that “we’re always going to be adjusting monetary policy in light of conditions on the ground” only strengthens our conviction that it is unlikely the FOMC will find that real-time conditions in late 2019 and 2020 will warrant rate hikes.
Powell was asked what might warrant an end to rate hikes. He responded, “A slowing down in job growth would be an indicator. You know, an unexpectedly sharp increase in wages or inflation could tell you that you’re reaching those points. You know, if headline growth slowed down, that’s another one. All of those things would be worth taking into consideration.” Well, two of those, a slowing in job growth and a slowdown in headline growth, are clearly a part of FOMC participants’ projections for 2019 and 2020. That is why we are skeptical that Powell’s FOMC will be raising rates further in 2020. It’s one thing to maintain the gradual pace of rate hikes in the first few quarters of 2019 as real GDP growth and job gains moderate; there’s a much higher bar to resume rates in 2020 as those trends continue.
An overarching theme was Powell’s lack of concern over the inflation outlook: “Now, let’s just admit that the inflation process has changed dramatically from where it was in the 1960s to where it is now. It’s in a good place now.” He said, “inflation seems to be fairly non-reactive to changes in slack. That is to say a flat Phillips Curve, and it’s a world of strongly anchored inflation expectations.” His message was clear that the FOMC would stick to its slow, gradual pace, barring a shock that would force them off that path. However, his logic that moving so gradually addresses the problem of “long and variable” lags seems off the mark. These lags can also be a reason to be more proactive.
He also expressed some confidence in the idea that there remains further labor market slack and downplayed the current relevance of the longer-run NAIRU: “the sense is what is the longer-run natural rate of unemployment mean, and so that really is a long-run concept that we think the economy will return to over the longer run, but obviously, that long run, you know, isn’t–it’s not creating problems in the short run for that forecast.” Specifically, he cited the surprising flatness of the participation rate in recent years as supporting evidence: “It’s a signal too that there may be more there on the supply side. There may be more labor supply than the prior trend would indicate.”
A “significant…lasting correction in financial markets” was offered as an impetus for slowing the pace of tightening, along with a “slowing down” that is inconsistent with their forecasts. However, he also declined to provide an assessment of the valuation of stock prices other than to say that by some measures they were in the “upper” part of historical ranges.
Powell’s views on ongoing trade disputes didn’t appear to have changed much. He reiterated that the eventual outcome could be positive or negative. He also observed a “rising chorus of concerns,” which is anecdotal, but pointed out that the hard data do not exhibit signs of a meaningful impact yet. He did hint at how the price effects of tariffs might be factored into monetary policy: “Is it just a one-time increase in the price level or is it actually fuelling higher inflation going forward? And that’s an important question in how we would think about the appropriate response.” This is how we would expect the Fed staff to be assessing the issue.
Projections through 2020: More Momentum, Similar Rate Hike Path
The median macro projections through 2020 were little changed, and the longer-run projections for growth and the unemployment rate were unchanged. Growth in 2018 was marked up three tenths and growth in 2019 was marked up a tenth, slightly more of an upward revision than anticipated. The unemployment rate for 2018:Q4 has marked up a tenth, to 3.7%, but is still projected at 3.5% in the fourth quarters of 2019 and 2020. We still see the FOMC projections as having an Okun’s Law discrepancy: The unemployment rate falls only two tenths in 2019 despite growth being seven-tenths above its longer-run level and is flat in 2020 despite growth still being a couple of tenths faster than potential. Stricter adherence to Okun’s Law would have suggested a decline in the unemployment rate to around 3¼%. The core inflation projections were unchanged–still 2% this year and 2.1% thereafter.
For 2018, the consensus for a fourth (December) hike strengthened. In September, only four participants projected three hikes, versus seven in June. The 2019 median continued to suggest three hikes. The distribution of dots for 2019 was essentially unchanged from June, with one additional dot on the net for four hikes.
The 2020 dots are the part of the projections that we see as most questionable. The 2020 median continued to indicate one hike. It appears that almost all FOMC participants projected at least one hike and that a couple of participants projected more than one. In fact, the distribution was only one dot away from a higher 2020 median. We don’t expect the FOMC to raise rates in 2020. It may look appropriate in model exercises, but we expect it will be extremely uncomfortable for the FOMC to resume raising rates at that point given the economic conditions they expect: Growth over a percentage point lower than in 2018, a flat unemployment rate (albeit well below the NAIRU), and core inflation essentially at its objective. As we mentioned previously, Powell’s remarks in his press conference about how the FOMC assesses the need for changes in monetary policy only reinforce our skepticism.
2021: Median Shows a Rise in the Unemployment Rate; Some Participants Projecting Funds Rate Cut
For this meeting, the projections were extended into 2021. We had expected that the median macro projections for 2021 would be tame, and they largely were: Inflation is projected to remain at 2.1% in 2021, and real GDP growth is expected to be at its longer-run level. However, the median has the unemployment rate rising two tenths in 2021, to 3.7%. A rise in the unemployment rate as the fund’s rate rises above neutral is a feature of our forecast, but we had expected they would shy away from showing this in their projections. What is odd, however, is that they project a rise in the unemployment rate despite growth remaining at potential–another instance of tension with Okun’s Law.
The 2021 median indicates no hike in 2021. But the dots are tilted to a rate cut rather than a rate hike, much as in our Macro Views forecast. Both the central tendency (3.1-3.6 in 2020 to 2.9-3.6 in 2021) and the mean (3.28% in 2020 to 3.23% in 2021) declined. This feature can also be seen in a rank-preserving exercise (Table 4), which would suggest at least four for cuts but only two for hikes (of 25bps at most). As the SEP is intended to represent “appropriate” monetary policy, it raises the question as to why these participants don’t regard an easier path earlier in the forecast horizon as a more appropriate policy option.
Longer-run Dot Edged Up
The median rose from 2.9% to 3%, likely as a result of compositional changes (the additions of Clarida and the SF Fed as well as the omission of Dudley). Now, no participant regards the longer-run as below 2.5%.
Median of Projections of FOMC Participants
Source: LH Meyer and Federal Reserve.
Projections of inflation and growth in the real gross domestic product (GDP) are for periods from the fourth quarter of the previous year to the fourth quarter of the year indicated. Projections for the unemployment rate are for the average civilian unemployment rate in thefourth quarter of the year indicated.
*LH Meyer forecast published September 20, 2018.
FOMC Participants’ Projections for the Year-End Level of the Target Funds Rate
Source: MPA and Federal Reserve. Updated September 26, 2018.
Mean FOMC Participant Rate Projection
Sources: MPA, FRB.
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