The Fed And More

The most significant event in the coming week is the first FOMC meeting under the Chair Powell. At ECB President Draghi’s first meeting he cut interest rates. He cuts rates at his second meeting as well, underwinding the two hikes the ECB approved under Trichet. At BOJ Governor Kuroda’s first meeting, an aggressive monetary policy was announced that was notable not only in its size, but also in the range of assets to be purchased under the Qualitative and Quantitative Easing (QQE).  

There is nearly universal agreement that the FOMC will hikes rates at Powell’s first meeting. This is being taken for granted. The failure to raise interest rates would be significantly more disruptive than a hike at this juncture. Indeed, the focus is not so much on the rate hike, but the forward guidance provided by the FOMC statement and the Fed’s forecasts (dot plot).

The FOMC statement is thought to be largely crafted by the Fed chair.  We locate Powell well within the recent tradition of the Fed and would be surprised with any significant innovation with the statement.  We suspect the statement will look past the recent string of economic data that has prompted downward revisions to Q1 GDP estimates below 2%, including the Atlanta Fed’s GDPNow tracker.  

The confidence Powell expressed in his recent testimony before Congress and the claim that what were headwinds have become tailwinds is unlikely to be undermined by some high frequency data, like the disappointing retail sales report and the lack of progress on the core PCE deflator. Consumer confidence, the March Fed surveys, with the impact of the tax cuts and government spending increase still in the pipeline, suggest that, for whatever reason, the post-crisis pattern of soft Q1 data may repeating itself. 

The main interest of investors is in the forecasts for the Fed funds target this year. There had been speculation that the Fed would signal that four rate hikes are likely this year, or three after this one. Several investment banks have done so, but we do not expect a fourth hike will be indicated in the week ahead.  By hiking rates at his first meeting, Powell would brandish his “hawkish bias.” To also indicate a fourth hike would be overkill.