Powell’s Fed And The Market

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

Unemployment forecasts were shaved, and the signal is that full employment is at hand.  This year, Fed officials expected the unemployment rate to slip to 3.8% from the December projection of 3.9%. Further progress is expected in 2019, with the unemployment rate rallying to 3.6%, where it is expected to remain in 2020. The long-term rate edged lower to 4.5% from 4.6%.