LSA Connect

Fed Note

The March FOMC meeting ended today featured a 0.25% increase in the fed funds rate, taking the range from 1.25-1.50% to 1.50-1.75%.  This was largely anticipated due to the strength of economic and labor data in recent weeks, which had moved the probability of a hike to almost certain, and the vote was unanimous.  With this being Jerome Powell’s first formal meeting and press conference as chair, markets are most likely looking for consistency, and a measured pace of continuing steady rate hike progress that started under Janet Yellen.  In the press conference, comments hinting of inflation fears, worry over fiscal or trade policy, the economy running ‘too hot’ or other signs that the Fed is ‘behind the curve’ in raising rates, would likely not be taken as well by financial markets.

The official statement noted the continuing strength in the labor market and economic activity rising at a moderate rate, while household and business spending has moderated from the prior quarter.  Inflation was noted as somewhat mixed, with signs of some increases but generally below target on a broader level.  A focus continued to show desire for a tempered pace of rate normalization.

The quarterly summary of economic projections was released and featured minor adjustments from the Dec. 2017 edition.  Median GDP estimates for 2018-2019 increased by a few tenths to 2.7% and 2.4%, respectively, staying above the longer-term expected rate of 1.8%.  Unemployment rates were also revised to stronger/lower levels, to almost a percent below the long-term expectation of 4.5%.  Inflation estimates were little changed, with 2.0% the expectation for the next several years and long-term.  Fed funds rate projections were unchanged for this year, at 2.1%, but ticked a few tenths higher for 2018 and 2019, at 2.9% and 3.4%, respectively—with the long-term a tenth higher to 2.9% (implying almost a 1% real rate).

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Economic Update 3-19-2018

• Economic data for the week was highlighted by a drop in retail sales and housing statistics, but gains in industrial production, continued strength in several manufacturing metrics and labor.  Inflation results were as expected, reducing fears from last month.
• U.S. equity markets fell back for the week on lackluster news, but were offset by positivity in foreign stock markets.  Bonds also gained a bit of ground as interest rates ticked downward under recent highs.  Commodities were flattish, although crude oil prices rose during the week.

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