FOMC Review

March 21, 2018

As expected and revealed in a published statement and new economic projections, the Fed implemented a sixth 25-basis increase in its federal funds target range to 1.50-1.75% and upgraded its forecasts GDP growth in 2018 and 2019, the labor market over the coming three years, and the core PCE inflation index for 2019 and 2020. The projected path in 2018 of the fed funds rate still implies three increases in all but thereafter steepens slightly to a median 3.4% late in 2020. In short, “the economic outlook has strengthened in recent months,” but the perceived sensitivity of future inflation has become greatly diminished to economic growth that exceeds the longer run potential in all three forecast year and to an unemployment rate the hovers almost a full percentage point under its long-run non-inflationary natural rate.

The federal funds target remains the primary operative vehicle of monetary policy. Changes in policy will be mostly signaled by changes in that interest rate, and the concurrent program of balance sheet reduction at a pace of $30 billion per month effective from April onward is intentionally designed not to be a tool for lessening monetary accommodation. It would take a major provocation for the announced schedule of balance sheet run-offs to be modified.

Chairman Jay Powell’s first press conference was interesting. The introductory text was generally shorter, more direct, and less ambiguous than typical. But in the Q&A, little additional information was conveyed. In discussing future scenarios, he conceded that there is a lot we don’t know, which underscores the crucial role of unfolding data and other developments that will guide future central bank decisions. He was reluctant to comment in depth about things over which other parts of the government set policy. The Fed is charged with a dual mandate of keeping inflation close to 2.0% and maximizing full employment within the first constraint. At each meeting, like this week’s, the main decision is where to set the policy interest rate. While the handout of projections indicates how committee members expect things to evolve, those are mere guidelines and do not constrain what actually will be done in the future.

The Chairman’s comments reflected discussions in this particular meeting.  So, for example, on the hot topic of the possible direct inflationary effect of U.S. import tariffs, specifics were not discussed at the meeting, so no quantitative sense of how this factor might influence the inflation forecasts of policymakers or their favored path of future interest rates was conveyed. On the separate but crucial matter of productivity, Powell said an improvement of that along with higher labor market participation are needed to raise America’s non-inflationary potential economic growth rate, but neither of those variables are in the long run affected by monetary policy.

Right after the FOMC statement and projections were posted on line, U.S. share prices and the 10-year Treasury yield climbed above 2.90%.  By the end of the press conference, the stock market had settled back slightly below levels before the statement’s release, and the Treasury yield was back at 2.89%. The dollar on balance lost a little ground against the yen and euro. Oil remained well-bid, and gold strengthened somewhat, too.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 

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