Slightly Stronger Outlook, Slightly Faster Pace to Neutral, Same Slight Overshoot

Today’s post-meeting statement and the accompanying macro and funds rate projections were broad as expected, reflecting a Committee that is somewhat more confident in the economic outlook than in March.  Accordingly, they believe that it is appropriate for monetary policy to move toward neutral slightly faster.  However, the Committee still anticipates that only a small overshoot of the neutral rate will be necessary after that. In particular, the median number of hikes for this year shifted to four while the number for next year remained three, as expected. There were a number of changes to the post-meeting statement, not all as we had anticipated, but we’ll get to those later. The story was in the projections. 

Macro Projections 

The revisions to the macro projections were about as expected. Growth this year was marked up a tenth, a revision that seems to us on the conservative side given the incoming data. Moreover, there were no changes to 2019 and 2020, or to the estimate of longer-run growth.  

The path of the unemployment rate was marked down two-tenths in 2018 and just a tenth, to 3.5%, in 2019 and 2020. The estimate of the longer-run level of the unemployment rate (the NAIRU) remained at 4.5%. Powell stressed the slow-moving nature of this variable. When pressed about the tension between an unchanged NAIRU  and the broader contours of the macro projections, he acknowledged that the  NAIRU “maybe” lower.  

Core PCE inflation in 2018 was marked up a tenth, to 2.0%, but unchanged in 2019  and 2020, both years still at 2.1%. The forecast for this year suggests that they see core PCE prices over the remainder of this year advancing at roughly their recent pace.  PCE inflation was revised up more  substantially, two tenths in 2018 and a  tenth in 2019, consistent with the rise in  

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 the fourth quarter of the year indicated.

*LH Meyer forecast published June 11, 2018. 

energy prices since the March projections. Headline inflation is projected to be 2.1% in 2018, 2019, and  2020. Powell emphasized that the symmetric nature of the inflation objective and that monetary policy should only react to “persistent overruns” of the inflation objective. He cited oil prices as a key factor for the edging up of headline inflation, which he expected would have only transitory effects. 

The Dots 

As we anticipated in our Briefing, the median dots for 2018 and 2019 moved up, to indicate four hikes and three hikes, respectively. As a consequence, the point at which monetary policy is projected to move into the restrictive territory has been brought forward, from 2020 to 2019. The consensus for the total number of rate hikes in 2018 should still be viewed as between three and four, given that the rise in the median dot was caused by the net upward movement of merely one participant. We also expected that the median 2020 dot  would remain unchanged, 

which it did; the total projected amount of tightening over 2018, 2019,  and 2020 remained eight hikes. The longer-run median dot remained at 2.9%. Powell  emphasized data dependency  and suggested that there was  no reason to put the pace of  rate hikes on “hold or on  autopilot.”  

Technical Adjustment to the Setting of the IOER Rate 

As the May minutes had strongly hinted, the Board raised the IOER rate only 20 basis points (from 1.75% to  1.95%), “to foster trading” of fed funds “well within” the target range. Perhaps to avoid the perception that  this action signals an imminent change to balance sheet normalization plans, Powell suggested that the FOMC  

saw higher Treasury bill supply (as opposed to reserves scarcity) as the predominant cause of a higher effective rate. He said that while at this time they don’t expect another adjustment to the IOER, a further change could be made in the future if necessary.  

The Statement  

Economic activity was described as rising at a “solid” rate, an upgrade from “moderate.” It was noted that  household spending “has picked up” and that the unemployment rate “has declined.” No surprises here. There was a change to the language about indicators of longer-term inflation expectations that we hadn’t anticipated. Previously, market-based measures of inflation compensation and survey-based measures of longer-term inflation expectations were each described separately. (In March, the language was “remain low”  and “little changed, on balance.”) This statement said that “Indicators of longer-term inflation expectations  are little changed, on balance.” We don’t ascribe great meaning to this change. But removing the reference to market-based measures of inflation compensation remain low seems to us a slightly hawkish lean, as concern about low inflation expectations has been a concern of some of the more dovish members of the  Committee. 

As for the following three paragraphs, they were revised much more than they have been in a while. However,  the changes, even the unexpected ones, haven’t influenced our outlook on monetary policy. The statement dropped the second half of the fourth paragraph, which included the (very stale) line that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” plus a  bunch of fluff. Because this omitted section included one of two cherished references in the statement to the inflation objective being “symmetric,” they added “symmetric” to their description of the inflation objective earlier in the paragraph. 

The Committee left unchanged the sentence in the third paragraph that reads, “The stance of monetary policy  remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2  percent inflation.” We thought that, if they were doing a major rewrite of the statement, they would drop this  line or perhaps change it to “modestly accommodative.” After all, the minutes, as well as public remarks, indicated that FOMC participants took issue with this line and expected to change it fairly soon. But we don’t read anything into their decision to keep this line for now. Almost all FOMC participants agree that monetary policy is accommodative, so it’s still true, and adjusting the characterization might have split the FOMC or caused an unwelcome market response. In any case, Powell noted that “relatively soon” would no longer  be accurate for the statement to describe the current policy stance as “accommodative.” 

Finally, they revised the forward-looking second paragraph slightly. The part about the outlook for growth,  the labor market, and inflation now reads: “The Committee expects that further gradual increases in the target  range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor  market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”  This is a little more streamlined than it was before and describes the outlook in more general terms, requiring  less tweaking in the future. For example, there’s now no reference to where “inflation on a 12-month basis  is expected to run” and there’s no reference to economic activity expanding “at a moderate pace.” 

The Press Conference 

In his press conference, Powell said that “the main takeaway is that the economy is doing very well.” Notably,  he seemed to be paving the way for the possibility of pausing at neutral by emphasizing the wide bands of  uncertainty surrounding estimates of the neutral rate: The neutral rate is “unobserved,” and “we shouldn’t  try to speak about it [with] a lot of precision or confidence.” 

He was not greatly worried about broad financial imbalances, though he did note some concerns about nonfinancial corporate leverage. Importantly, he saw no signs of trouble with household balance sheets and housing. However, he also emphasized the risks posed by financial imbalances: “It’s worth noting that the 

last two business cycles didn’t end with high inflation, they ended with financial instability, so that’s  something we also need to keep our eye on.” 

As we have emphasized, Powell confirmed that policymakers view ongoing trade developments as a risk to the forecast. He noted that the business contacts of some FOMC participants were reporting concerns, but there was, as yet, nothing in the hard data suggesting worries about current or prospective trade developments were having an effect on current economic activity, at least for the time being.  

Powell also announced a new policy of holding press conferences following every FOMC meeting, beginning with the January 2019 meeting. He stressed that the frequency of press conferences “doesn’t signal anything” about the frequency of rate hikes. The frequency of macro and rate projections will still be quarterly.  Announcing this change so far in advance was a clever way of decoupling the frequency of press conferences from expectations about the pace of tightening. 

Finally, we are very confident that Powell made a declaration never uttered by any of his predecessors. In  response to a press question, he stated emphatically: “Our mandate has nothing to do with marijuana.”

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