Stocks and bond yields are higher ahead of today's historic first-non-economist-run FOMC meeting as anxious eyes were focused on how hawkish or dovish Powell's fully-priced-in rate-hike would be.
- *FED RAISES RATES QUARTER POINT, SIGNALS TWO MORE HIKES IN 2018
- *FED ESTIMATES SHOW STEEPER PATH FOR RATE INCREASES IN 2019-20
- *FED SAYS `ECONOMIC OUTLOOK HAS STRENGTHENED IN RECENT MONTHS'
The Fed's language seemed to downgrade the economic outlook...
"economic activity has been rising at a moderate rate"
They replaced "solid rate" with "moderate rate"
And they shifted from "Gains in employment, household spending, and business fixed investment have been solid," to "Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings."
The Key Issues heading in were as follows...
- Will there be 3 or 4 hikes for 2018 and whether 2019 will shift to a more hawkish 3 (all derived from the dot plot)?
- Will economic projections be upgraded? (Likely mostly GDP and the unemployment rate, not inflation.)
- Does The Fed hint at faster pace of tightening in outer years? (or are we already near the terminal rate)
And the answers...
- Fed will hike 3 times in 2018 - as most had expected - but raises number of hikes in 2019 to 3 from 2.
The reason for that is while 4 FOMC members were needed to raises their the median dot, only three did so, and there were 13 of 15 fed dots at 3 or more 2018 hikes vs 10 of 16 in dec.
Still, it is worth noting that while the dot plot still shows a median for 3 rate hikes this year, more (7/15) officials now favor 4 or more hikes this year. And dots become much more dispersed through 2020 than before (see below).
Meanwhile, the Fed sees an economy that strengthens in 2018 and beyond when it comes to GDP and unemployment...
- Median 2018 gdp growth est. rises to 2.7% vs 2.5% dec. est.
- Median unemployment at 3.8% in 4q 2018 vs 3.9% dec. est.
... But, dovishly, the Fed kept its median core pce inflation unchanged at 1.9% for 2018
Here are the economic projections:
3 hikes (total including today) for 2018...2018 2.125% (range 1.625% to 2.625%); prior 2.125%
- 3 hikes for 2019 (up from 2) - 2019 2.875% (range 1.625% to 3.875%); prior 2.688%
- 2 hikes for 2020 (up from 1) - 2020 3.375% (range 1.625% to 4.875%); prior 3.063%
- Longer Run 2.875% (range 2.250% to 3.500%); prior 2.75%
Comparing the December to March dots shows that someone went hog wild with their 2020 dot projections:
With regard the economic projections, Bloomberg reminds readers that when Fed officials last published forecasts, after their December meeting, they still didn't have the full details on the contours of the tax legislation that would be passed later in the month. They also didn't know about the bigger-than-expected spending package that came in February.
The Wind at Their Backs (at least for now): Evolution of 2018 Consensus Forecasts for CPI, GDP & Fed Funds Target pic.twitter.com/6fRwD2ZrUA— Michael McDonough (@M_McDonough) March 21, 2018
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Commenting on the statement, Renaissance Macro's Neil Dutta notes that the Fed came out largely neutral, which is "not really hawkish"
"next year, the median FOMC official sees a slight overshoot on inflation (+0.1ppt) another 0.3ppt drop in the unemployment rate and just one more rate hike. That's somewhat less than you'd expect in a standard Taylor Rule type model. That is not really hawkish, in my view. Buy stocks. Buy front end."
* * *
Bear in mind that expectations for Q1 GDP have been tumbling...
There remains a hawkish tilt to The Fed (if historical tendencies are to be believed)...
And notably, Bloomberg reports that most economists believe the risks are rising for higher-than-expected growth and inflation. About three-fourths of respondents said those risks now pointed to the upside, up from 63 percent in December.
* * *
Since The Fed last hiked rates in December, financial conditions are actually tighter (thanks to February's chaos). This is the first post-rate-hike tightening in financial conditions since The Fed started hiking in Dec 2015...
And as financial conditions tightened, gold has been the leading asset-class (as the dollar sank)...
Since The Fed hiked rates 30Y Yields are up 35bps and the rest of the curve is up 55-60bps as the yield curve has flattened dramatically...
And shifting to The Fed's so-called normalization of its balance sheet... it seems like it keep adding to the balance sheet when stocks drop?
Ahead of the statement, the market is pricing in 3.1 rate-hikes in 2018...
In fact, the probability of 4 rate-hikes this year has surged in the last week to 33.5% - its highest yet...
Finally we note, as UBS 'warns'...
"For the first time since the US Fed's independence, the rate setting committee will be presided over by someone who is not an economist - but a lawyer.
In 1923, the German Reichsbank was presided over by someone who was not an economist - but a lawyer"
Full statement redline below:
On to the press conference...