Primer for Federal Reserve Meeting March 20-21

Federal Reserve Chairman Jerome Powell will preside over his first official Federal Open Market Committee (FOMC) meeting this week, March 20-21. A sixth rate hike by the FOMC since it started to normalize rates in December 2015 is widely expected. Chairman Powell will have to present the consensus forecast for overall economic growth. Look for the FOMC members to revise up their estimate for growth in 2018 to 2.8% from the 2.5% rate they released at former Fed Chair Janet Yellen’s last meeting in December.

The primary reason for the additional growth Is the surge in federal spending agreed upon in the government’s continuing budget resolution. We may not have all the details on how those funds will allocated by Friday’s deadline of March 23, but we do know that the agreement to spend more was bipartisan. Both political parties backed it, so neither party will want to risk a government shutdown and the backlash in response. The government is taking on more debt, which will boost growth over the spring and summer.

That said, the year started off weak again. Estimates for the first quarter have dipped below 2% despite robust employment gains and a pickup in manufacturing activity. Some of the weakness may be attributed to a series of storms, many of them along the East Coast, well into March. We fully expect to see a bounce-back in growth during the second quarter, but the weak start to the year will keep participants at this FOMC meeting from getting too far ahead of themselves in responding to the strength in their forecast by calling for more aggressive rate hikes. They need to see, not just anticipate, inflation rising before fundamentally changing their stance on the number of rate hikes this year. Look for the consensus forecast to hold at three rate hikes in 2018. Our forecast holds at four rate hikes this year.

The statement following the announcement of another rate hike on Wednesday will signal optimism about growth for the year. Chairman Powell will also be optimistic in his tone regarding the outlook for the overall economy. The most recent Beige Book report by the regional Federal Reserve Banks was full of real-time color on the economy including anecdotal reports that wages are finally picking up. The FOMC needs to see those gains show up in actual economic measures of wages.

Powell will be asked about his views on tariffs. Do not expect an answer, given the uncertainty surrounding tariffs and which countries or sectors might be affected. The FOMC will likely discuss the risks of a trade war during this meeting; details of that debate will be revealed when the Fed releases the minutes for this meeting to the public in three weeks.

As Chairman, Powell will want to put his mark on the Federal Reserve. One way would be to further increase the transparency of Fed decision-making by eventually holding a press conference after each FOMC meeting when he could explain in simple terms, and on a more timely basis, what the internal consensus looks like. That would help free the Fed to respond to economic data as it is becomes available, with less risk of roiling financial markets. Market participants currently expect the FOMC to move only at the meetings followed by a scheduled press conference, putting an artificial limit on the Fed in between press conferences. There was once a time when the Fed moved between meetings as economic developments occurred. That is not likely to happen this year but needs to be considered as one of the Fed’s prerogatives.

Bottom Line
Chairman Powell will sound bullish on the economy without raising concerns about a more aggressive path for rate hikes. He will stay away from commenting publicly on tariffs because trade policy is in the hands of Congress and the president, not the central bank. The challenge is, the Fed will have to respond to the economic impact of tariffs once they are implemented. That could make decisions on rate hikes more complicated because tariffs erode consumers’ purchasing power without providing an offsetting boost to wages as inflationary domestic policy would.

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