Originally posted at Briefing.com
You have to hand it to Fed Chairman Powell. He orchestrated unanimity among Federal Open Market Committee (FOMC) members at his first meeting overseeing the FOMC and he projected a calm, informed, and experienced voice at his first press conference discussing the FOMC's policy decision and projections.
We're calling it a Powell-Wow at the FOMC because the Fed chair had command of the show.
Time will change and that perspective with respect to the Fed chair could change over time, too, but he made a good first impression.
Something to See in PCE Inflation Forecast
The vote to raise the target range for the fed funds rate by 25 basis points to 1.50% to 1.75% was unanimous and it wasn't a surprise.
Similarly, it wasn't a surprise to see the Fed's central tendency projections for the change in real GDP increase, and the central tendency projections for the unemployment rate decrease, for 2018, 2019, and 2020.
The only eyebrow-raising projections were for PCE inflation and core PCE inflation over the same period.
The inflation forecasts were barely changed even though the median estimate for the unemployment rate in 2019 (3.6%) and 2020 (3.6%) is nearly a full percentage point below the Fed's longer-run forecast of 4.5%. In fact, the median estimate for PCE inflation in 2019 (2.0%) was unchanged from December while the median estimate for PCE inflation in 2020 (2.1%) edged up only 0.1 percentage points.
When asked about the seeming disconnect, Mr. Powell acknowledged that the relationship between changes in the slack and the unemployment rate don't appear as tight as before, which has caused a flattening of the Phillips Curve.
The Fed chair, however, was quick to remind reporters that there was a range of individual estimates provided by Fed members, implying that the median estimate can't be characterized as a catch-all view. He repeated that reminder when discussing other variables.
That disclaimer also applied to the Fed's interest rate projections.
Sight Lines
The first line of sight for market participants was that the median estimate for 2018 continued to point to an expectation of three rate hikes this year and not four as some had feared.
The second line of sight was the slightly higher median interest rate projection for 2019 (from 2.7% to 2.9%) and 2020 (from 3.1% to 3.4%).
Mr. Powell quickly tempered any undue concern about those changes when he calmly reminded everyone that all forecasts are subject to change based on the evolution of the economy. They could go up or down. That is, the path of interest rate hikes could be a little less gradual, he said, or a little more gradual based on how future economic conditions unfold.
That might sound like a cop-out explanation, but it is a common-sense perspective from the world's most influential central banker who understands the future is unknown — ergo, it is uncertain, making all fallible forecasts today subject to change.
On a related note, he was asked several times at the press conference if committee members discussed trade issues (i.e. tariffs) and their potential impact on growth. He said a number of members brought up the tariff discussions, but that there was no thought that changes in trade policy should have any effect on the current outlook.
At this stage, Mr. Powell added, tariffs were only identified as a low-profile risk that has become a more prominent risk to the outlook.
Another interesting statement made by Mr. Powell is that he is surprised wage growth hasn't been stronger given the low unemployment rate. The Fed will know the labor market is getting tight, he added, when there is stronger wage growth.
What It All Means
For now, the Fed is aiming to walk a "middle ground" with its interest rate policy to sustain the economic expansion.
Hence, the Fed is anticipating a gradual pace of increases in the fed funds rate to make sure it doesn't do too much, too soon, to choke off the expansion or too little along the way to necessitate aggressive rate hikes later.
That approach is not dissimilar from the one pursued by former Fed Chair Yellen. The difference today is that Fed Chair Powell sold it better.
Considering the stock market traded lower after the Fed decision, it is easy to think the stock market wasn't buying what the Fed Chair was selling. That would be a misplaced assumption.
The stock market is in a funk because it is anxious about trade wars unfolding and its most influential leadership group — the information technology sector — failing to lead.
The stock market has a sense, too, that the Federal Reserve will likely raise interest rates again relatively soon, barring some shock to the economy and/or financial system.
That's the bias embedded in the Fed's forecasts, and even with the Federal Reserve walking a middle ground, rising rates will be a headwind for a stock market trading at a full valuation
