Developments since the December FOMC meeting—including a partial shutdown of the federal government, further concerns about an economic slowdown in China, and continued volatility in financial markets— certainly make a March hike a closer call. However, we are sticking with our call for a March hike, the rationale being that the economic outlook remains robust even with the significant tightening in financial conditions in the fourth quarter of 2018.
The incoming economic data continue to point to robust final private demand, particularly consumer spending, which seems sufficient to achieve 2½% real GDP growth in Q4 despite drag from net exports and inventories. Since the December FOMC meeting, U.S. financial conditions have tightened, but only slightly, on balance. The S&P 500 declined as much as about 8%, but it rebounded and is now down only about 1% since the December meeting. Risk spreads have widened, but this has been offset to some extent by declines in Treasury yields. The dollar has declined somewhat, and oil prices remain low.
As for the government shutdown, we have tended to see such events as not having a meaningful direct effect on the economic outlook: Gross domestic product is lower during the shutdown, but that is made up later when it inevitably reopens and affected workers receive back pay. While this shutdown may last longer than previous episodes, since Democrats, Republicans, and President Trump have established strong and very public positions that are incompatible, we continue to assume it will be resolved without fundamentally altering the outlook.
Since the FOMC meeting (see our comprehensive overview here), a couple of policymakers have remarked on policy. Notably, following the surprising December FOMC statement, projections, and press conference, there was a sell-off. Two days later (Dec. 21), President Williams (New York Fed) gave an interview, to which markets responded quite positively, at least initially. The market’s positive response notwithstanding, the substance of Williams’ remarks didn’t seem to depart substantially from what Powell delivered on Wednesday. One possible exception was concerning balance sheet normalization. Whereas Powell seemed to all but rule out any adjustment to the FOMC’s plans, Williams did seem to express some openness, at least in theory, to reconsidering them (see Williams Interview: The Market Just Wants to Know the Fed Cares).
In addition, Mester gave an interview (Dec. 21) in which she reiterated the data-dependent nature of policy going forward: “we’re going to be setting policy based on the outlook and risks around the outlook.” She noted that downside risks if they materialize, could call for a lower rate path. However, she stressed that even though “the global outlook has softened somewhat,” with “uncertainty around trade and tariff policies,” the economy is still doing quite well: “We want the expansion to continue, we think the growth that we’ve had this year has been quite strong. We think the economy’s underlying fundamentals are quite good.” However, she also said, “we have seen some softening in the interest-sensitive sectors,” and “Business investment has been not as strong,” though “there’s some indication that it may pick up.” As for financial markets, the key issue for the FOMC is, “Are they trying to tell us something about fundamentals? And so that’s the question.” She warned that sentiment staying negative “could feed into the real side of the economy, and so that’s something we have to monitor.”
|Source||Current||One Week Ago||Two Weeks Ago|
|Atlanta Fed GDPNow||2.7%||2.7%||3.0%|
|New York Fed Staff Nowcast||2.5%||2.5%||2.4%|
|Release||Period||Actual||Consensus||Revision to Previous Release||Previously Released Figure|
|FHFA House Price Index MoM||Oct||0.3%||0.3%||—||0.2%|
|Conf. Board Consumer Confidence||Dec||128.1||133.5||136.4||135.7|
|Pending Home Sales MoM||Nov||-0.7%||1.0%||—||-2.6%|