Fed: US economy on track toward achieving its dual mandate

The Federal Reserve is more confident that the US economy is on track toward achieving its dual mandate, notes the research team at BBH.

Key Quotes

“In recent weeks, the market expectations have converged with the Fed’s forecasts for three rate hikes this year. The risk of four hikes is greater than two, but tactically, such a decision need not be made for several months. Throughout the cycle, the market has not been as aggressive as the Fed’s forecasts, which suggests that talk that the Fed is somehow behind the curve is exaggerated.”

“Fed Chief Powell offered the imagery that captures what appears to be the consensus at the central bank. What were headwinds have become tailwinds. The dollar is not appreciating, and global growth is the best in at least a decade. Oil prices have risen. Fiscal policy is stimulative.”

“This means that the high-frequency economic data in the coming days may spur reactions to the headlines but are unlikely to alter expectations for Fed policy. This seems likely to be the case despite the fact that the US economic reports are top shelf: CPI, retail sales, and industrial output.”

“The composition of US growth is changing from last quarter. Industrial output surged in Q4 2017, spurred by the recovery from the devastating storms, and appears to be slowing considerably at the start of the year. The consumer is also a little less buoyant. A 0.3% rise in February retail sales would simply offset the 0.3% decline in January, leaving a flat performance. The components that feed into GDP may hold in a bit better, but together January-February may average near trend of 0.2%. Both the Atlanta and New York Fed’s GDP growth tracking models have eased in recent weeks and now stand at 2.5% and 2.8% SAAR, respectively.”

“Consumer price pressures are stable. January’s outsized 0.5% monthly increase will not be repeated. Economists look for a 0.2% increase in February, which would lift the headline y/y pace to 2.2% from 2.1%. Due to the base effect, a 0.2% rise in the core rate will keep the y/y rate steady at 1.8%.”

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