The big financial event of the week comes Wednesday when the Fed reveals the outcome if the FOMC meeting, followed shortly by a new Summary of Economic Projections and Chairman Jerome Powell’s press conference. There may be only a handful of us still interested in monetary policy by the time Wednesday comes around; Rosenstein and Kavanaugh are sucking the oxygen out of the room. Arguably not a bad thing as the economy is not really the nation’s biggest current challenge.
My view of the FOMC outcome is over at Bloomberg, where I conclude:
Fed Chairman Jerome Powell and his fellow policy makers remain primarily focused on a domestic economy that holds substantial momentum as the fourth quarter approaches. At best, the message from the Fed is neutral relative to the June SEP report and press conference. The risk, however, is that the Fed’s message is on the hawkish side, including an upward shift at the lower end of rate projections that doesn’t necessarily imply a faster pace of hikes, but more confidence that the gradual pace of increases will extend deep into 2019.
The message delivered by the FOMC will tend modestly toward hawkish this week, firming up expectations that the Fed will press on for longer than markets anticipated just a few weeks ago. For what it’s worth, recently the market participants have had to catch up to the Fed rather than vice-versa. This tends to be the case during the mature phase of a business cycle.
The Fed may drop the phrase “policy remains accommodative” because of the wide range of estimates of neutral policy. Policy might in fact be close to neutral. But Federal Reserve Lael Governor muddied the waters further by differentiating between short and long run neutral rates; in her framework, policy in the short-run clearly remains accommodative. So maybe they keep the phrase. In addition, the Fed could retain the language because they fear its removal would be taken as a sign that of an imminent policy pause. My thinking is that if they remove the “accommodative” language, we should not interpret that removal as dovish, a point that I think will be evident in the SEP and Powell’s press conference.
The reason the Fed continues to press on with the rate hike campaign is quite simple – the economy refuses to catch a cold, let along give up the ghost. As long as that is the case, the Fed will continue to ratchet up the pressure with gradual rate hikes. To be sure, there is plenty to worry about. Trade wars. Oil prices. Emerging markets. Political crisis in the U.S. It is reasonable to be concerned that these factors will eventually cause a real dent in the U.S. economy, but so far the economy and financial markets have remained remarkably resilient to these threats. Consequently, they remain risks to the outlook but do not materially effect the Fed’s outlook in such a way that would trigger a Fed pause.
Bottom Line: Eventually the Fed will stop hiking interest rates. But that time will likely not come in 2018. And even an extended pause might have to wait until the second half of 2019.