Powell Artfully Dodges Questions on Trade and Fiscal Policy

FOMC Raises Rates as Expected.
The Federal Open Market Committee (FOMC) voted unanimously to raise short-term interest rates by .25% to a range of 1.5% to 1.75%. The FOMC upgraded its median forecast, which reflects the additional fiscal stimulus from increased government spending. FOMC members are now expecting 2.7% growth in 2018, up 0.2% from the forecast for growth released back in December. The “dot plot,” or the range of FOMC members’ expectations for rate hikes, was less dispersed than in December, but fell just short of shifting from an expectation of three rate hikes to four rate hikes in 2018.

Inflation Outlook Picks Up.
The outlook for inflation picked up slightly but not as much as one might expect given their upgrades to the growth outlook. The FOMC has been humbled repeatedly when their inflation forecasts have missed and will not commit to a more aggressive forecast until they actually see the whites of the eyes of inflation. That is likely to occur by the Fed’s June meeting. The transitory downdraft in inflation created by the move to unlimited cell phone data plans will dissipate in the March inflation report, which will be reported in April; pipeline inflation has moved up quite substantially, especially in the service sector, a portion of which is expected to be passed onto consumers; and, perhaps most importantly, real-time data on wages suggests that they are moving up across the board. One CEO recently told me he has not seen such a broad-based acceleration across new hires since the late 1990s. That does not mean we will see the kind of wage gains we once did, but something has clearly shifted. Labor shortages are finally forcing some firms, albeit with a substantial delay, to raise wages. Signing bonuses are on the rise. Firms are also rethinking how and whom they hire. Former convicts, veterans and people with both visible and invisible disabilities are rejoining the labor force and getting hired.

New Sheriff in Town.
Chairman Jerome “Jay” Powell broke with his predecessor Chair Janet Yellen by jumping straight to the economic justification for the rate hike instead of reading the committee’s official statement first. This allowed the new Chairman to avoid taking a deeper dive into the data. He was more plainspoken in discussing the economy and answered the same number of questions as his predecessor but in a much shorter period of time. He also dodged more questions by repeating the Fed’s dual mandate to work for stable inflation and full employment, a tactic which helped to keep the press conference short.

Powell was careful to acknowledge discussion about the uncertainty surrounding the effects that tariffs and tax cuts could have on growth without criticizing the administration or Congress on policy decisions. His willingness to discuss tariffs and trade at all, given the high level of policy uncertainty, indicates how much they were actually discussed at the meeting. That puts a new focus on the minutes from this meeting, which will be released in three weeks. We expect them to include concerns about risks from a trade war, which Powell acknowledged, including concerns expressed by businesses directly to the Fed’s regional banks around the country.

The forecasts and more bullish tone on the economy revealed the influence that regional Fed presidents currently hold on the FOMC. Four of seven seats on the Fed’s Board of Governors remains vacant. This has diminished the ranks of those who would be the Chairman’s natural allies and votes on interest rates. The regional Fed presidents currently control the majority of votes on interest rates, which is fine as long as the chairman and the regional presidents are in sync. One can imagine a situation in which the regional presidents want to move more aggressively than the chair, given the composition of presidents who are voting this year.

More Press Conferences?
When asked if the chairman is considering holding more frequent press conferences, he acknowledged that it is a consideration. It would be a way for Powell to attain more power over the message tied to the meetings. It would also give the Fed more flexibility to move at any meeting, which is technically true but not expected at the moment. He was cautious to couch his comments in a way not to roil markets; he said he didn’t want such a shift to be seen as a change in monetary policy or the trajectory of rate hikes. There is a lot of consensus within the Fed to have even a short press conference after every meeting. The main reason it was not done under Chair Yellen is because of the time she spent preparing for the press conferences. She spent a great deal of time going into what the appropriate economic explanation would be for every question. Powell is not expected, nor will he, provide the same kind of response. He has already shown that he would prefer to stay out of the weeds and stick to shorter, less detailed answers.

Bottom Line
The FOMC with Chairman Powell at the helm raised short-term interest rates and did not roil markets with any of his responses during his first press conference. That was despite an upgrade to the Fed’s median growth forecasts and the potential to move more aggressively on rate hikes in a few months. He can sleep easy tonight.

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