Deutsche…We were looking for three things following today’s FOMC meeting: FXWW

From the FXWW Chatroom: (1) would there be a shift in language around risks being “roughly
balanced;” (2) would the median dot rise from three to four rate hikes
this year with the terminal dot rising commensurately; and (3) would
Chair Powell convey a more hawkish tone with respect to the risks of the
economy overheating?
1) No change in the balance of risks language. “Roughly” still encompasses
enough flexibility to accommodate a shift in inflation risks looking forward from
the downside to the upside without necessitating a change in wording. With the
dots moving up (see below) and signaling more aggressive policy tightening, that
action was evidently viewed as enough to keep the risks roughly balanced.
Elsewhere in the statement, the language on current economic activity was
softened a bit in light of weaker initial Q1 data, though the description of
employment gains was upgraded from “solid” to “strong”. More importantly, on
economic prospects, it was noted that “the economic outlook has strengthened
in recent months.” This point was emphasized in Powell’s prepared statement for
the press conference, which noted fiscal stimulus, a strong labor market, firming
global growth and stimulative financial conditions as factors behind the upgraded
outlook. The message regarding the “gradual” pace of rate increases to come
remained intact, with the federal funds rate still seen as “likely to remain, for some
time, below levels that are expected to prevail in the longer run.“ Powell reiterated
the gradual mantra in his opening statement, as well.
2) There was a significant move up in the dots—not quite enough to move the
median dot for 2018 from three to four increases—but enough to add about
another 25 basis points (bps) to the path of rates beyond 2018. The 2018 call was
a close one, and the move up in 2019 and beyond was clearly a reflection of the
strengthening of the economic outlook (as discussed in more detail below). We
thought that the shift in economic forecasts warranted a change in the near-term
rates outlook sooner rather than later. Our guess was that if the median did not
change, it would be because Chair Powell wanted to maximize his flexibility and
keep the option to move to four at a later date with more data in hand to confirm
the outlook.
3) Powell came across as balanced in the press conference, emphasizing the
strengthening of the economic outlook despite the softness in recent indicators.
In terms of style, we saw this as a strong initial performance—a person confident
in his grasp of the material, brisk and to the point in his answers, willing to duck
questions that were potential pitfalls, yet informative in his answers. In general,
he articulated the breadth of views within the Committee rather than the median
view, and the uncertainty one must attach to each participants’ projections. He is
considering whether or not to do this more often (as in a press conference after
every meeting), but would not want his doing so to be taken as a policy signal.
On substantive issues raised at the press conference, Powell indicated that the
Committee is likely going to need to see evidence that wage and price inflation
are picking up meaningfully before becoming concerned about significant
overheating associated with the tightening labor market. He confirmed that the
SEP forecasts reflected a continued expectation that the Phillips curve will remain
relatively flat
He said that the fiscal expansion was providing a meaningful boost
to aggregate demand over the next three years, and possibly some lift to the
supply side via a pickup in investment and productivity. (But we note that any
expected supply-side lift was too small to make a difference in the median or
range of the Committee’s expectations for longer run growth prospects.) On the
topic of a trade war, he indicated that the Committee is not yet too concerned
about the potential macroeconomic implications of a trade conflict, though this
has become a more prominent risk. He also said rather emphatically that, NO,
the possible prospect of pressure from the White House if it came time to raise
rates more aggressively with an election approaching did not cause him to lose
sleep at night; the Fed would keep its focus squarely on the mission it has been
given by Congress.
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