In the face of the evidence of an economy growing solidly above trend, potentially accelerating, with a tightening labor market, Fed Chair Powell sounded upbeat, according to Greg Gibbs, Analyst at Amplifying Global FX Capital Pty Ltd.
“He said, “My personal outlook for the economy has strengthened since December.” As the Chair of the Fed, this raises the risks that FOMC members see the potential for a faster pace of policy tightening from the three hikes currently projected by the FOMC dot-plot.”
“Key takeaways from the prepared statement:
“After easing substantially during 2017, financial conditions in the United States have reversed some of that easing. At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation. Indeed, the economic outlook remains strong.”
This suggests that the Fed is largely unconcerned with the recent market developments and unlikely to delay further policy tightening if equity markets remain lower or fall moderately further.
“The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment. Moreover, fiscal policy is becoming more stimulative.”
The fiscal policy comes in here as adding to demand growth at a time when the outlook is already robust.
“In this environment, we anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC's 2 percent objective over the medium term. Wages should increase at a faster pace as well. The Committee views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely.”
"Powell hits specifically on the highly sensitive subject of wage growth.
- In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis. While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the same time, inflation remains below our 2 percent longer-run objective. In the FOMC's view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data.
- Headwinds are now tailwinds – suggesting risks to outlook turning more to a positive skew (even if the FOMC still describes risks as “roughly balanced”.
- In questioning, Powell suggested he was amenable to some easing of the regulatory requirements on banks. The shift in tone may be one reason why US bank shares have been outperforming other countries’ bank shares.
- Comments from Powell also appeared to admit that the US budget is not on a sustainable trajectory. He said, “We really need to get on a sustainable fiscal path, and the time to be doing that is now.” This speaks to one of the downside risks for the USD; that the market places a higher risk premium on US government bonds.
- One more dovish comment was that Powell does not appear to view the labor market as tightly stretched as other FOMC members. On the neutral unemployment rate he said, “If I had to make an estimate, I’d say it’s somewhere in the low fours,” (compared to a median FOMC estimate of 4.6%).”
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