The FOMC Raises the Bar for Further Rate Hikes

The message from the January FOMC meeting on Wednesday was very dovish—that there will likely be no more rate hikes until actual data are showing higher inflation. The FOMC also released a statement on  Monetary Policy Implementation and Balance Sheet Normalization, and it confirmed the widespread view that the Fed would remain in a floor system, which would require abundant reserves. We explored these aspects in greater detail here

There were several significant data releases last week, the most important of which was the January jobs report (see our note). While it was very strong, it has no impact on the FOMC’s decision to pause in  March. While it added to the evidence that the U.S. economy remains strong, it has diminished relevance for the June decision as well, given the emphasis Powell put on the inflation data as the primary factor that would motivate further tightening. A tight labor market would be a problem only if it results in unacceptably high inflation, which has been far from the case. 

Following the FOMC meeting, several policymakers commented on the change in the FOMC’s messaging.  However, it is important to note that all of them have dovish reputations, to different degrees. Kaplan, who is quite close to the center, argued “for the time being we take no action on the fed funds rate” (Feb. 1). His  base case was for the pause to last “certainly at least the first couple of quarters.” A warning that policy should be easier would be credit spreads widening significantly. Bullard (Feb. 1) stressed that, for the FOMC,  “there wouldn’t be any presumption now anymore that we’re going to move in one direction or the other.”  Kashkari (Feb. 3) saw more slack remaining in the labor market, and he went so far as to surmise that  Chairman Powell is “coming around” to that view as well. 

Nowcasts (2018:Q4) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.5% 2.7% 2.8%
New York Fed Staff Nowcast 2.6% 2.6% 2.6%
CNBC/Moody’s Survey 2.7% 2.9% 2.9%

Recent Data 

While the government has reopened after the partial shutdown, significant releases originally scheduled for last week, including Q4 GDP and December personal income and outlays, were postponed. Still, there were several other data releases last week, and overall the incoming data, while mixed, continue to come inconsistently with an economy growing at an above-trend pace. There’s certainly no indication of a sharp deterioration. The most significant of these was the jobs report for January. Payrolls increased 304K in  January, and gains in previous months look strong even considering the December gain was marked down  90K. Monthly payroll gains have now averaged 232K over the last six months, a very strong pace at this point in the expansion. Average hourly earnings are up 3.2% over the last 12 months, consistent with the  

a story that wages are firming, but only gradually, in response to a tight labor market. The Q4 ECI print, also released last week, was likewise in line with that story, though it was somewhat softer than anticipated.  Another piece of good news was the January ISM report, which showed a rise in the headline index. The previous report showed a sharp decline in the ISM index in December, which sparked a great deal of consternation even though it had declined from very high levels to a level still representing expansion. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Conf. Board Consumer Confidence Jan 120.2 124.0 126.6 128.1
Pending Home Sales MoM Dec -2.2% 0.5% -0.9% -0.7%
Employment Cost Index QoQ 4Q 0.7% 0.8% — 0.8%
Bloomberg Consumer Comfort 27-Jan 57.4 — — 57.4
New Home Sales MoM Nov 16.9% 4.8% -8.3% -8.9%
Change in Nonfarm Payrolls Jan 304k 165k 222k 312k
Unemployment Rate Jan 4.0% 3.9% — 3.9%
Average Hourly Earnings MoM Jan 0.1% 0.3% — 0.4%
Average Hourly Earnings YoY Jan 3.2% 3.2% 3.3% 3.2%
Average Weekly Hours All Employees Jan 34.5 34.5 — 34.5
Labor Force Participation Rate Jan 63.2% 63.0% — 63.1%
ISM Manufacturing Jan 56.6 54.0 54.3 54.1
U. of Mich. Sentiment Jan F 91.2 90.7 — 90.7
U. of Mich. 5-10 Yr Inflation Jan F 2.6% — — 2.6%
Construction Spending MoM Nov 0.8% 0.2% 0.1% -0.1%
Wholesale Inventories MoM Nov 0.3% 0.5% 0.9% 0.8%
Wards Total Vehicle Sales Jan 16.60m 17.20m — 17.50m

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