Weekly Update: Continued Focus on New Runoff Plan

The balance sheet was given considerable attention recently. Brainard (Feb. 14) thought that balance sheet  runoff should “come to an end later this year.” This is the most definitive signal to date that runoff will end soon. She reiterated the preference for an ample-reserves system to guard against volatility and mentioned that demand for reserves by financial institutions is much higher than pre-crisis. She also called for a buffer of reserves of “substantial” and “comfortable” width to prevent volatility. In addition to the technically-driven  need to stop balance sheet runoff (reserves), she also said “We wouldn’t want those instruments [fed funds  rate and balance sheet] to be working at cross purposes.” The previous week, Harker (Feb. 7) estimated that the minimum amount of reserves to be $1-$1.3 trillion, plus a $100-billion buffer. Rosengren (Feb. 14) wants  “reserves to be high enough where that’s not a particular concern.” Mester (Feb. 12) noted that ending runoff  will be finalized “at coming meetings.” In her view, the Fed would ascertain the level of reserves at which scarcity is apparent by estimating the demand curve slope. Daly (Feb. 15) thought an end to runoff by year en was “well within the range of feasible.” 

The consensus among policymakers was that 2019 would see slower, but still solid, growth. However,  downside risks, principally from abroad, have increased. There is little evidence of strong inflationary pressures. George (Feb. 12) agreed with this general assessment: “The economy is doing pretty well and  inflation is not rising.” Brainard (Feb. 14) concluded that this outlook meant “We’ll have to see want and see  what the right move–if any–later in the year is.” She saw inflation as coming in “around target” and found  the CPI read “encouraging.” She maintained that “underlying domestic momentum has been pretty solid.”  She also argued that policymakers were not seeing many transmissions from the labor market to inflation. Daly  (Feb. 15) surmised that “the case for a rate increase isn’t there” in 2019 if her baseline (of moderate growth and no price pressures or acceleration) is realized. A rate increase would be an appropriate path if inflation or economic growth surprises the upside.  

On the other hand, a few policymakers still saw the need for more tightening: Mester (Feb. 12) repeated her inclination that the fund’s rate could need to move “a bit higher” if her baseline outlook is achieved. She pointed out that wage growth and labor scarcity have not led to inflationary pressure. She differed from some of her peers on inflation expectations, noting that she saw those expectations as well-anchored. Harker (Feb.  13) saw “slight” downside risks and held the view that “one rate hike for 2019 and one for 2020 are  appropriate,” although he also said that inflation is “edging slightly downward.” Bostic, too, saw one hit in  2019 and one hike in 2020 as his base case (Feb. 15). 

President Trump signed a spending bill that keeps the government open to avert a temporary U.S. government shutdown was scheduled to begin on Friday, Feb. 15.  

The UMich 5-10 year inflation expectations measure declined to 2.3%, which is the lowest level registered in the last 50 years and matched only by the 2.3% reading in December 2016. Recall that Clarida’s January  speech said that this measure was “now at the very lower end of the range that has prevailed historically.”  It has fallen further since. 

CPI data were a bit of a bright spot, with both headline and core measures on a YoY basis slightly exceeding consensus estimates. Brainard called these data “encouraging.” Core producer prices also registered higher 

than-anticipated growth, although not to the extent of signaling inflationary pressures. Import prices declined a bit more than expected.  

Retail sales, however, came in well below expectations. Indeed, Brainard noted that the retail sales data were a “miss” and caught her attention. They added to the story of “some downside risks,” with the usual proviso that it is only one data point. The UMich consumer sentiment index increased from the low January reading. 

Additionally, industrial output declined sharply in January, according to the Fed. Part of the cause was a fall in vehicle output, although the December figure for that category was very strong. Nonetheless, the decline was broad-based. Capacity utilization also deteriorated. 

Nowcasts (2018:Q4)

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.5% 2.7% 2.5%
New York Fed Staff Nowcast 2.2% 2.4% 2.6%
CNBC/Moody’s Survey 2.4% 2.7% 2.7%
Release Period Actual Consensus Revision to Previous Release Previously Released Figure
CPI MoM Jan 0.0% 0.1% 0.0% -0.1%
CPI Ex Food and Energy MoM Jan 0.2% 0.2% — 0.2%
CPI YoY Jan 1.6% 1.5% — 1.9%
CPI Ex Food and Energy YoY Jan 2.2% 2.1% — 2.2%
PPI Final Demand MoM Jan -0.1% 0.1% -0.1% -0.2%
PPI Ex Food and Energy MoM Jan 0.3% 0.2% 0.0% -0.1%
PPI Final Demand YoY Jan 2.0% 2.1% — 2.5%
PPI Ex Food and Energy YoY Jan 2.6% 2.5% — 2.7%
Retail Sales Advance MoM Dec -1.2% 0.1% 0.1% 0.2%
Retail Sales Control Group Dec -1.7% 0.4% 1.0% 0.9%
Business Inventories Nov -0.1% 0.2% — 0.6%
Import Price Index MoM Jan -0.5% -0.2% — -1.0%
Import Price Index YoY Jan -1.7% -1.6% -0.5% -0.6%
Industrial Production MoM Jan -0.6% 0.1% 0.1% 0.3%
Capacity Utilization Jan 78.2% 78.7% 78.8% 78.7%
U. of Mich. Sentiment Feb P 95.5 93.7 — 91.2
U. of Mich. 5-10 Yr Inflation Feb P 2.3% — — 2.6%

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