Fed: Greater confidence in the economy - BBH

Analysts at BBH note that the Federal Reserve delivered the widely anticipated hike at Jerome Powell's first meeting as Chair as the Fed signaled greater confidence in the economy and increased the rate path by adding a hike in 2019 and 2020. 

Key Quotes

“While the average forecast (dot) for this year rose, the median continued to anticipate two more rate increases this year.”

“Powell, more than Yellen, tried to play down the market's focus on the dot plots (Summary of Economic Forecasts--SEP).  He argued that Fed took only one decision and that was to hike rates and cautioned against seeing the median forecast as the Fed's view.   As Yellen had previously noted, albeit less forcefully, there are individual projections that are submitted and compiled, and are subject to change.”

“It is clear that officials have greater confidence that the dual mandate will be reached.  The statement and the forecasts reflected that the "economic outlook has strengthened in recent months," and that inflation is expected to rise "in the coming months" rather than "this year" as the Fed previously said.   The statement recognized that household spending and business investment "moderated" after a strong Q4.”

“However, the fiscal stimulus, which Powell acknowledged, had a meaningful impact on the individual forecasts, is not expected to improve trend growth, even though the tax incentives encourage investment and may help boost productivity.  The median GDP forecast was lifted to 2.7% this year from 2.5% in December, and the 2019 forecast was raised to 2.4% from 2.1%.  Growth in 2020 and the long-term projection were unchanged at 2..0% and 1.8% respectively.”

“The Fed's projections would leave the policy "modestly restrictive" in 2020, Powell said.   The median forecast for the Fed funds target this year was unchanged at 2.1%.  Of the 15 members of the FOMC, seven see at least four hikes this year and eight forecast three or fewer.  There are two dovish members that do not think that more hikes are warranted.  Bullard previously identified a this as his view, while the other dove is thought to be Bostic or Evans.  Next year's median forecast was lifted to 2.9% from 2.7% and to 3.4% in 2020 from 3.1%.  The long-run equilibrium rate edged to 2.9% from 2.8%.”

“Given the economic optimism expressed in the statement and forecasts, the Fed kept its risk assessment balanced as it has been.  This is also understood to be less than hawish.  This underscores the general impression that although official confidence that growth will strengthen with the help of the largest dollop of fiscal stimulus, underlying or structural economic forces and relationships, are not anticipated to change much.”

“There had been some speculation that Powell would indicate the intention to hold a press conference after every meeting (as we have been urging), and while it is something he is clearly considering, it was not announced..  We suspect if it were, that investors would see it as a tad hawkish, even though Powell said there would be no policy implication in the decision.”