Weekly Update: Policymakers Continue to Shift Away from Presumption that Next Move a Hike

Several policymakers stressed the “patience” message in their last public remarks before the start of the blackout period for the March FOMC meeting. We saw their comments as supporting our baseline call of no further rate hikes, as there was little indication of a presumption that the next move would necessarily be a  rate hike. Brainard (Mar. 7) revealed that she has made material adjustments to her economic outlook and  expected fewer rate hikes than she did previously (click here for our commentary): “Prudence counsels a  period of watchful waiting — especially with no signs that inflation is picking up.” Williams (Mar. 6) was very clear that he had no “lean” as to where policy should go. He said, “we can afford to be flexible and wait for  the data to guide our approach.” He thought “The current federal funds rate of 2.4 percent puts us right at  neutral.’’ Powell, too, (Mar. 10) thought the current stance was “roughly neutral.” Notably, Rosengren (Mar.  5), who has a hawkish reputation, also stressed the data-dependent nature of any future rate decisions,  although he still seemed more open than others to the possibility that further tightening could be needed this year. He said, “the inflation process is one reason we can be very patient right now.” He thought it would take “several [FOMC] meetings” before policymakers have a “clearer read” on the economic picture and agreed with the “patiently watching” stance. 

Chairman Powell made multiple appearances. In a “60 Minutes” interview (Mar. 10) that was geared to a  general audience, he said the fund’s rate stance was “in a very good place right now” and reiterated the need  to monitor both domestic data and foreign developments, “particularly in China as I mentioned and in Europe.”  Brainard, too, cited weakness in key foreign economies. In prepared remarks (Mar. 8), Powell noted that core  inflation was “quite close to 2 percent” and said that inflation “will probably run a bit below our objective for  a time due to declines in energy prices, but those effects are likely to prove transitory.” He said, “With nothing  in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the  Committee has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy.” 

The balance sheet continued to be in focus ahead of the March FOMC meeting when we expect further progress to be made on how to end runoff. The emerging consensus is to stop runoff, which, as Powell put  it, would hold the balance sheet size constant “to allow reserves to very gradually decline to the desired level  as other liabilities, such as currency, increase.” Powell said further details will be announced: “reasonably  soon.” Brainard revealed her preference for a shorter-maturity portfolio (as well as a portfolio that eventually consists of only Treasuries), which she said could be accomplished by tilting future purchases toward Treasury bills and shorter-dated coupons. But she stressed that decisions on portfolio composition will not be made immediately. Williams maintained that “Personally my view is we’re nowhere near the point where we would  be at kind of scarcity of reserves.” 

The recent incoming data have been mixed, pointing to modest real GDP growth in Q1 and suggesting downside risk to Q4 real GDP growth relative to BEA’s initial estimate. At the same time, they’ve provided reason to expect this softness to prove to be temporary, as is our expectation. The retail sales report for  January, released this morning, is one example. The weak December reading was revised down further,  suggesting Q4 consumer spending will be marked down relative to BEA’s initial estimate. That low monthly jumpoff for Q1 also bodes poorly for consumer spending growth in the current quarter. However, the  

fundamentals for consumer spending still look solid, and the January data point to a return to solid growth:  Sales in the control group—which includes only those categories of retail sales that are direct inputs into the  PCE data—rebounded sharply in January, increasing 1.1%. This seems likely to provide some reassurance to markets after Friday’s employment report for February showed a sharp slowing in job gains in February, to only 20K. As we wrote in our note, however, while the report contributed to the uncertainty about what’s happening in the U.S. economy early in 2019, the labor market still looks strong. The February job slowdown followed an outsize 311K gain in January. Payroll gains have averaged around 190K over the last three- and six-month periods and the unemployment rate is 3.8%. 

Nowcasts (2019:Q1) 

Source Current One Week Ago
Atlanta Fed GDPNow 0.5% 0.3%
New York Fed Staff Nowcast 1.4% 0.9%
CNBC/Moody’s Survey 1.0% 1.4%

Recent Data

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Construction Spending MoM Dec -0.6% 0.1% — 0.8%
ISM Non-Manufacturing Index Feb 59.7 57.4 — 56.7
New Home Sales MoM Dec 3.7% -8.7% 9.1% 16.9%
Trade Balance Dec -$59.8b -$57.9b — -$49.3b
Nonfarm Productivity QoQ 4Q F 1.9% 1.5% 1.8% 2.3%
Unit Labor Costs QoQ 4Q F 2.0% 1.7% 1.6% 0.9%
Housing Starts MoM Jan 18.6% 10.9% -14.0% -11.2%
Building Permits MoM Jan 1.4% -2.9% — 0.3%
Change in Nonfarm Payrolls Feb 20k 183k 311k 304k
Unemployment Rate Feb 3.8% 3.9% — 4.0%
Average Hourly Earnings MoM Feb 0.4% 0.3% — 0.1%
Average Hourly Earnings YoY Feb 3.4% 3.3% 3.1% 3.2%
Average Weekly Hours All Employees Feb 34.4 34.5 — 34.5
Labor Force Participation Rate Feb 63.2% 63.2% — 63.2%
Retail Sales Control Group MoM Jan 1.1% 0.6% -2.3% -1.7%
Retail Sales Advance MoM Jan 0.2% 0.0% -1.6% -1.2%
Business Inventories MoM Dec 0.6% 0.6% — -0.1%

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