CPI Inflation Still Soft, Fed Not Yet Deterred

Remember you can sign up for email notification with the link to the right —>

The CPI report for September revealed that inflationary pressures remain muted. To date, weak inflation numbers have not deterred the Fed from hiking rates, but instead moderated the pace of rate hikes to gradual. I expect this will continue to be the case. Does this mean the Fed has gone crazy?

Core CPI inflation was again soft in September; the annualized one month gain was just 1.4%. The annual change remains above 2% (remember that PCE not CPI is the Fed proffered price gauge; in, recent year PCE inflation has been running below CPI inflation) but will roll over further if these soft monthly numbers continue. Shelter inflation appears to be moderating again: The pickup earlier this year was a bit of a surprise to me given reports that rent growth was slowing across many major metro areas. Consequently, I have been anticipating that the gains would not hold. Excluding shelter, service sector inflation firmed in September after a string of meager gains: What I find most interesting is that goods inflation has been very soft in the past two months despite tariffs and higher labor costs: This of course runs counter to the narrative that tariffs will become an excuse to push through higher prices to consumers. What’s going on here? Higher labor costs and higher material costs have to show up somewhere. If firms can’t push those costs through to final prices, then they show up in faster productivity growth or softer margins. This tweet from CNBC reporter Joumanna Bercetche:

suggests that analysts anticipate firms will be able to manage cost pressures through with a mix of the first two options (pushing through costs or higher productivity). But if the Fed continues to take a hard line on inflationary pressures, then it has to be productivity or margins. And if underlying productivity growth remains mired at roughly 1% give-or-take, then the cost pressures will reveal themselves in softer margins.

I think the Fed would be broadly happy with such an outcome. Optimally of course, they would like faster productivity growth. But the second best outcome is margin compression over inflation, which has the added benefit of tempering equity price gains. Enough pressure to keep inflation in check and ease the pace of job growth, but not enough to tip the economy into recession. Kind of a sweet spot for the Fed.

But should the Fed be raising rates at all given the weak inflation numbers? Shouldn’t they be rapidly lowering estimates of the natural rate of unemployment instead? Has the Fed gone “crazy” as President Donald Trump claims? Jared Bernstein noted that I dodged that question in yesterday’s post:

Yes, I did dodge that question. I try, although not always successfully, to contain my work to “what will the Fed do” rather than “what should the Fed do.” I think I am more effective at the former if I divorce it from the latter. And if you are a market participant, you are probably looking for the former not the latter.

That said, I do have an opinion on this. My suspicion is that in the absence of rate hikes, inflation would be higher now and potentially high enough to be a threat to price stability. I don’t think you can use low inflation now as a reason to argue that the Fed should stop hiking rates because those rate hikes probably contained inflation. I think we are now too far along in the cycle to have not raised rates.

Moreover, I see room to raise rates further. Earlier this year I was worried that the Fed would deliberately invert the yield curve in their campaign to hike rates. I would view such an action as a policy error. Since then, however, the long end of the curve has sold off producing a bit of a bear steepening. This strikes me as an indication that the economy can indeed sustain the Fed’s rate path.

Finally, I am somewhat nervous that even in a low inflation environment the Fed appears fairly resistant to the idea that they should pause at something close to neutral to take a look around and wait for a bit more of the lagged impact of past rate hikes to work their way through the economy.

Speaking of crazy, Trump doubled-down on his Fed criticism today, saying the Fed is “out of control.” Trump did add that he didn’t expect to fire Federal Reserve Chairman Jerome Powell, but of course that threat is now out there (although the Fed Chair supposedly can only be fired for cause).

I do not think that this criticism will induce Powell to hike just to prove a point; Powell is going to be the adult in the room. Trump is looking to lay the blame for any slowdown in activity on the Fed, and has made itself a sitting target for such a game. The Fed’s forecasts very clearly show that central bankers intend to guide the economy into a slower growth trajectory. Now yes, we all know they believe such a policy path reduces inflationary pressures and actually extends the life of the expansion, but such nuance will be lost when the economy does slow.

Moreover, don’t forget that Trump knows how to work the press. This story gets him the attention he craves. So he will keep at it.

Bottom Line: Inflation remains low. Does this mean the Fed’s plan is crazy, or that it is successful? Looks more like success than craziness in my opinion. Regardless of that opinion, the Fed looks likely to keep following the path they laid out – gradual rate hikes until the economy looks likely to revert back to what they think is a sustainable pace of growth.

Don’t Panic. Yet.

A bit of an unpleasant day in the stock market. Not unpleasant enough, however, to send much of a panic among Federal Reserve policy makers. In fact, quite the opposite – my sense is that Powell & Co. will be happier if the pace of equity gains moderated. Indeed, I would say that this is a lesser-mentioned goal of the tightening campaign. From their perspective, taking some of the steam off the stock market occasionally reduces the risk that financial instabilities grow and become a potential economic threat.

I wouldn’t panic yet either; I don’t think this is the beginning of the end for this bull market.  What would be the beginning of the end? When the Fed starts to believe they can’t cut rates in the face of economic weakness due to inflationary pressures. We aren’t there yet. 

Both the Dow and the S&P500 were down more than 3% Tuesday. The story floating around the press was that this was a risk-off day as equity traders processed the implications of evolving Fed policy. In contrast, Treasury bonds barely budged; long bonds even fell a notch, lifting long rates. My interpretation is that fixed income traders had already processed the shifting policy environment; equity traders were a bit late to the party.

What is that changing environment? Well, as I have documented over the past several weeks, the Fed has been slowly phasing out forward guidance, leaving market participants a bit more uncertain about the path of rates going forward. I think the Fed views this uncertainty as a policy feature, not a bug. Recall the criticism the Bernanke’s Fed contributed to market complacency by laying out so clearly the rate path. Powell may very well share that criticism (a good question for the December press conference).

The Fed has focused attention away from r-star estimates (and forward guidance in general) to their forecasts instead. And therein lies the problem for market participants. The incoming data appears to confirm the forecast, policy makers appear to agree that the data confirms the forecast. That rate forecast is hawkish relative to market expectations that the Fed would soon pause in their rate hike campaign. Worst, that forecast suggests they keep hiking even after the impact of fiscal stimulus starts to wane. The upshot is that we need to incorporate both a higher path of rates and additional uncertainty about the path of rates into prices. On net, that should sap the equity markets of some strength.

The Fed is not going to ride to the rescue here. There is no Powell-put for a 3% decline. Or even an extended decline like earlier this year. And Bloomberg caught this from New York Federal Reserve President John Williams last night:

“The primary driver of us raising interest rates is just the fact that the U.S. economy is doing so well in terms of our goals,” Williams said Wednesday in a reply to questions after a speech in Bali, where the annual meetings of the International Monetary Fund and World Bank are taking place. “But I would also add that the normalization of monetary policy in terms of interest rates does have an added benefit in terms of financial risks.”

“A very-low interest-rate environment for a long time does, at least in some dimension, probably add to financial risks, or risk-taking, reach for yield, things like that,” he said. “Normalization of the monetary policy, I think, has the added benefit of reducing somewhat, on the margin, some of the risk of imbalances in financial markets.”

This is not new. Federal Reserve Chairman Jerome Powell has made similar statements. There is a widespread concern that persistently low interest rates would become a problem not for price inflation, but for financial stability. Reducing financial accommodation to minimize those risks is clearly a policy goal here.

To add some additional drama to the day, President Donald Trump tossed in his two cents on monetary policy:

“The Fed is making a mistake,” he told reporters on Wednesday as he arrived in Pennsylvania for a campaign rally. “They’re so tight. I think the Fed has gone crazy.”

Trump is setting the stage to blame the Fed should the economy tank. Luckily, I don’t think that’s about to happen. It is important to remember that the Fed’s rate forecast will only hold in a solid economic environment that is generally supportive of equities. If the economy tilts downward more quickly than expected, the Fed will reel back on those rate forecasts. They might hem and haw before they shift, but most likely they will shift. If the economy faces a clear economic challenge, the Powell put will become a reality.

There are, however, two caveats to this prediction. One is just straight-up policy error, misreading the data. The second caveat, which is what concerns me, is that the Fed reaches a point where they don’t think they can ease due to inflationary pressures. As a general rule, central bankers think that inflation expectations are sufficiently well contained that they can maintain a gradual path of rate hikes. I think this also means that they will be react to a substantial change in the economic outlook – a greater slowdown than they anticipate – with a shift toward a more dovish policy path. But there of course is a chance that inflationary pressures emerge such that they think they need to defend their inflation target. In my opinion, in such a circumstance they will choose recession over inflation.

Bottom Line: Don’t panic. Yet. The Fed’s rate path might be higher and more uncertain than anticipated, but this largely reflects a more positive economic outlook. That’s ultimately a good thing. Watch the inflation numbers. Inflation is what could sour the Fed’s plan and its willingness to respond to a substantial deterioration in the outlook.

This Fed Won’t Panic At The First Sign Of Slower Growth

Recent speeches by Federal Reserve policy makers make clear that they have reduced their reliance on estimates of the long run neutral level of interest rates as a guide for monetary policy. Going forward, market participants will need to more closely scrutinize the central bank’s Summary of Economic Projections for clues as to where rates may be headed.

Those forecasts currently point to a fairly hawkish path for monetary path. Not only do they indicate policy will eventually turn restrictive, but they also suggest policy will remain restrictive even as economic growth slows. In other words, the Fed doesn’t anticipate turning tail on their policy path even if the economy dips next year.

Continued at Bloomberg Opinion…

Jobs Report Clears Path for the Fed

Click here for newsletter version.

The labor market retained sufficient strength to convince Powell & Co. to stick with the current policy path. Expect more rates hikes in the months ahead as the early reads on the third quarter, primarily October survey data, indicate that the economic momentum continues. There is little reason at this point for the Fed to abandon its forecast toward the dovish side. That said, watch for signs that policy makers will be rethinking their unemployment forecast while doubling down on the natural rate forecast. The combination would play out in a hawkish direction.

Job growth defied growing expectations for a blow-out number and instead came in below consensus with a 134k gain. The headline print was likely weighed down by Hurricane Florence; previous months were revised higher. The net impact is that job growth continues at a monthly pace of roughly 200k, well above the roughly 100k policy makers generally expect to be consistent with a non-inflationary economy after the cyclical pull on labor force participation wanes.

Indeed, the jobs report gives hints that the surprise burst of labor force growth over the past year has reached a conclusion. Labor force participation overall and for prime ages workers have flat-lined, and labor force growth slowed markedly, helping to push the unemployment rate to 3.7%, a 48-year low. Recall that policymakers recently edged up their year-end unemployment forecast at the September FOMC meeting with the median policymaker expected 3.7% rather than 3.6%. In other words, the economy is at the Fed’s target well ahead of schedule and the pace of labor force growth versus job growth looks likely to push the unemployment rate down below their target.

Another way to think about this is that the Fed’s September forecast of faster growth and higher unemployment spoke to a growing conviction in a supply side growth story. The September jobs report weakens that narrative.

Central bankers might have waved off additional unemployment declines had wage growth continued to stagnate, but the wage data is starting to tell a different story. To be sure, year-over-year growth edged down from 2.9% to 2.8%, but the annualized pace over the last three months has been a healthier 3.76%. Supposed the labor market sustains that pace and do that math here: If we assume as the Fed does roughly 1% productivity growth and a 2% inflation target, you get an additional .76 percentage points of wage growth. That additional wage growth needs to show up somewhere. 

The Fed can hope that in the short-run the additional wage growth shows up as narrowing profit margins and real wage gains for labor. Indeed, I think that the Fed will risk this scenario as long as possible and not accelerate the pace of tightening – as long as inflation stays low. But obviously if inflation instead looks to be heading above 2.5% on a sustainable basis, they will be looking to engineer a slower economy via a faster pace of rate hikes or via signaling that they anticipate a higher terminal rate.

Keep an eye on the forward-looking indicators employment – they suggest the labor market isn’t loosening momentum anytime soon. Not only are initial unemployment claims holding at ultra-low levels, but temporary employment continues to rise. Both suggest job growth will hold strong.

Separately, Atlanta Federal Reserve President Raphael Bostic made a hawkish turn last week: 

The incoming economic data on the real side of the economy have come in stronger than I had been expecting earlier this year. So much stronger, in fact, that the central question in my mind is whether the apparent strength in GDP and job growth is a signal that I have materially underestimated the underlying momentum of aggregate demand. If that’s the case, the potential for overheating would require a higher path for rates than what I had been thinking.

And from business contacts:

…there was a marked uptick in the reported ability of firms to pass on cost increases. This was especially true for firms subject to tariff- and freight-related cost increases. Those firms reported little to no pushback when passing along rising costs to their customers. But I get the sense that the phenomenon is becoming more widespread. It’s a development that I will continue to watch closely.

Bostic concludes:

Current conditions suggest, to me, that we ought to get to a policy stance where our foot is neither on the gas pedal—what we call an accommodative policy—nor on the brakes—what we call a restrictive policy. Such a neutral policy position would allow the economy to stand on its own.

It is unclear if Bostic means moving faster to neutral than expected, or that neutral is higher than he excepted, or both. A “higher rate path” could be interpreted in any of these ways. But, at a minimum, it suggests upward drift of low dots toward the median, or, in other words, a growing confidence in the median rate hike projection.

Also note Bostic’s perception that firms can more easily push through prices to customers. If these concerns grow, it sounds likely he could be easily pushed into thinking that rates need not only to get to neutral, but beyond to restrictive.

Bottom Line: Incoming data continues to support the Fed’s basic forecast that rates need to climb higher. I think the data increasingly supports the case that rates need to move in a restrictive zone before the Fed can breathe easier, but much depends on the evolution of the inflation data. A hint that inflation could be sustainable higher than 2.5% would probably embolden central bankers to take more aggressive action.

Be Wary Of Shifting Fed Stories

This is just quick note to consider how Fed speak might evolve. Basically, I realize that given my recent push to highlight the hawkish aspects of Fed policy, I might be exposing myself to the risk of seemingly dovish Fed speak. This is a good time to reflect on what we might see from Fed communications in the coming months.

I see this Reuters story wondering if the Fed will react to the rise in long term yields. So far, it is just noise, at least according to Cleveland Federal Reserve Bank President Loretta Mester:

“The fact that interest rates moved on one day is not a concerning thing. Markets are volatile,” Cleveland Fed President Loretta Mester said, adding that strong payroll data and perhaps this week’s U.S.-Mexico-Canada trade agreement provided a boost to bond yields. “It is still appropriate for us to be moving interest rates up gradually,” she said.

That sounds right; the magnitude of recent Treasury moves should not be considered disconcerting, particularly if they reflect a more optimistic growth scenario. That said, the exit from forward guidance poses a communications challenge not only for Fed watchers and market participants, but also for central bankers. One benefit of explicit forward guidance is that it directly communicates the policy stance, thereby reducing the odds crossed wires between financial markets and the Fed. The intended effect of adding uncertainty into the picture by pulling forward guidance has the consequence that the Fed may have difficulty communicating their message.

The upshot is that we might see apparently conflicting messages if the Fed feels that the market has drifted too far away from the central story. It will be different than the “cacophony of voices” problem; this will be evident possibly from even a single voice. Note already how easily New York Federal Reserve President John Williams pivoted away from r-star. And I keep hearing complaints that Federal Reserve Chair Jerome Powell is “all over the place,” seemingly hawkish on one day and dovish the next. These transitions might appear more stark if, for instance, the Fed feels they need to rein in rate hike expectations.

Another way to think about this: In my view, Powell & Co. currently spend something like 50% of their time living in the 1970’s, 40% living in 1994-95, and 10% in the Great Recession. So most of the time they will be bouncing between worries that need to keep enough pressure on rates to ensure inflation remains contained and worries that the long end of the bond market shoots higher due to excessive rate hike expectations. The message might thus bounce back and forth accordingly.

Personally, I am looking forward to the post-forward guidance era. I think it will be much more fun and interesting. But I understand that not everyone will share that opinion.

Bottom Line: My approach to the post-forward guidance era centers on paying extra close attention to handicapping the Fed’s forecasts in light of how incoming information impacts those forecasts.  For instance, look at the initial unemployment claims numbers, a forward looking indicator that provides no hint of a shift in the labor market. That’s hawkish in that it confirms the forecast (which is more aggressive than market implied forecasts). Think of the Fed speak as trying to push us back to that approach. It might seem clumsy at times, but that is just what you need to expect in the absence of a more explicit communication strategy.

“Long way from neutral, probably.”

Click here for newsletter version!

We are coming up on jobs day – the months just fly by, don’t they? Expectations are high that the numbers will easily suffice to keep the Fed hiking, and Wednesday’s data raise the risk of substantial upside surprise. How high will rates go? The answer is of course data dependent, but Powell dropped a hint today by letting everyone know that he thinks the end point is still many months away.

Two numbers today stood out. ADP estimates 230k private sector jobs were created in September. The ISM non-manufacturing report measure of employment jumped to 62.4, up from 56.7 in August. Both indicators suggest the consensus forecast of a 180k NFP gain is on the low side. Be wary of an upside surprise, plus possible upward revisions in the August numbers (a month revised upwards in six of the last seven years). My model anticipates a a whopping 312k payroll gain, which seems crazy strong; my takeaway is simply that the risk to the consensus forecast is on the high side. 

Of course, it’s not all about the payrolls number. Watch also the unemployment rate. The consensus is that it dips a bit to 3.8%. This is particularly interesting because the median estimate of central bankers for the year end unemployment rate edged up from 3.6% to 3.7%. If it dips lower than 3.8% I expect the Fed will become a bit more nervous that they are underestimating the strength of the economy. Also keep an eye on wage growth – it was high enough in August to convince central bankers that their estimates of the natural rate of unemployment can’t be terribly wrong, but low enough not to kindle concerns of imminent inflationary pressures. Some will reassess the latter position is wage growth continues to climb.

Meanwhile, Federal Reserve Chairman Jerome Powell did a Q&A today. I was not surprised that he maintained the continued “gradual rate hike” mantra. I was surprised when he said “we’re a long way from neutral, probably.” That seemed like it was a bit of a slip. And a hawkish one at that. What seems remarkable to me is that I keep hearing a dovish interpretation of the Fed’s recent disavowal of r-star and the related demise of forward guidance. But what Powell let slip is that he clearly still has an estimate of neutral and we are nowhere near it. That’s hawkish.

Powell also added that “we may go past neutral.” In this sense, he is arguably a bit more dovish than colleagues such as Chicago Federal Reserve President Charles Evans, who reiterated toady his expectation that rates turn restrictive. Still, I see Powell as edging toward admitting what the forecasts reveal. Remember, you don’t have r-star as a guide anymore, but you still have the rate forecasts. You might say that there is a wide variation in the rate forecasts. But it looks like there is a common element – no matter where a central banker thinks neutral is, the majority if not all (not counting St. Louis Federal Reserve President James Bullard), expect rates will climb above their estimate of neutral. In other words, they all see policy as becoming restrictive.

Take the forecasts seriously. Handicap the data against the forecasts. Right now, the forecasts tell a hawkish story, especially if you let go of the r-star anchor. And the data doesn’t give reason to think otherwise. 

Finally, bond bears get their day in the sun as the long end of the yield curve lets go of its anchor. Something had to give in the face of ongoing rate hikes. Either the yield curve would soon invert, raising the prospect of recession, or it would start shifting upward on the back of some mix of stronger growth, firmer inflation expectations, and a rising term premium. The latter story currently has the upper hand. That is about as good a story as the Fed could hope for.

Bottom Line: You know the bottom line. The US economy is on a roll, and that will induce the Fed to keep adding pressure – gradually – to the brakes.

Sunny Skies for The US Economy

Newsletter version here!

The US economy continues to power forward, providing central bankers with plenty of reasons to keep hiking rates. But with inflationary pressures held at bay, the pace of rate hikes remains gradual. Rate hikes will likely continue until policy turns from accommodative to restrictive, but the Fed has jettisoned the “r-star” guide, leaving us to pick apart the data to determine when policy rates have moved to neutral and beyond.

Recent data follows a familiar pattern of general strength. Household spending in August was up 3% compared to a year earlier, the fastest pace since 2016. The spending looks likely to continue on the back of solid job growth. Indeed, consumers appear quite pleased with the situation. The University of Michigan Consumer Sentiment measure rebounded in September while the Conference Board confidence number rose to an 18-year high. 

That said, the disproportionate happiness of Republican respondents may render the confidence measures less useful as a guide to consumer spending. Since 2017, spending growth has consistently fallen short of forecasts based on confidence numbers – it is unusual to see persistent one-sided errors in the forecast. That said, even discounting the confidence numbers accordingly still leaves behind a solid pace of spending growth.

Manufacturing activity remains impressive. The ISM manufacturing survey components continue to track along near cycle highs. Interestingly, the export and import components, though off their highs, don’t appear consistent with the anecdotal comments reflecting concerns about the trade situation. In other words, the tariff concerns remain a speedbump rather than a roadblock. And hopefully the new trade agreement with Canada and Mexico will help ease some of the concerns.

While the economy keeps chugging along, inflation remains contained. Although core-PCE inflation met the Fed’s target in September, the monthly gain was a meager 0.4% annualized, pulling the 3-month change down to 1.3%. A tight economy has yet to induce widespread inflation pressures. Nor have tariffs changed the inflation picture yet. Nor have firms used tariffs as an excuse to raise prices aggressively. Now, that doesn’t mean we should count on low inflation going forward, just that some of those prediction may have been premature. Firms may just delay prices changes until the end of the year, at which point we might again see outsized seasonal inflation gains.

Federal Reserve Chairman Jerome Powell gave a glowing review of the economy when he took to the podium in Boston:

From the standpoint of our dual mandate, this is a remarkably positive outlook. Indeed, I was asked at last week’s press conference whether these forecasts are too good to be true–a reasonable question! Since 1950, the U.S. economy has experienced periods of low, stable inflation and periods of very low unemployment, but never both for such an extended time as is seen in these forecasts.

That doesn’t mean the Fed is gearing up to kill the expansion on the basis that an inflationary outbreak is imminent. That seems unlikely given the apparent flatness of the yield curve. Instead, the Fed is trying to manage the risk that inflation could emerge. Powell takes the middle ground here:

At the risk of spoiling the surprise, I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge. What is more likely, in my view, is that many factors, including better conduct of monetary policy over the past few decades, have greatly reduced, but not eliminated, the effects that tight labor markets have on inflation.

Powell credits central bankers with controlling inflation expectations, which in turn is a key element in flattening the yield curve:

When monetary policy tends to offset shocks to inflation, rather than amplifying and extending them, and when people come to expect this policy response, a surprise rise or fall in labor market tightness will naturally have smaller and less persistent effects on inflation. Research suggests that this reasoning can account for a good deal of the change in the Phillips curve relationship.

Ultimately, Powell balances the threat of moving too slowly and risking that inflation expectations rise against the threat of moving too quickly and killing the expansion. The result is by now a familiar policy stance:

Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation.

Gradual rate hikes will continue. When will they end? That of course is the million-dollar question. Neither the terms “neutral rate” or “r-star” enter Powell’s speech, a guidepost that he began tossing aside in September and that New York Federal Reserve President John Williams blew up last week. Given the expected path of the economy, though, we can anticipate that policy rates will rise until they become restrictive. Boston Federal Reserve President Eric Rosengren predicted such an outcome in his speech Monday:

Federal Reserve policy makers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance

Of course, this information is plain to see in the SEP forecasts. Restrictive policy is the method by which the Fed nudges up the unemployment rate to a level they believe consistent with continued low inflation. And something to watch – in those forecasts, policy remains restrictive even as growth slows.

Bottom Line: Any dovishness you read in the Fed still reflects only that they expect to maintain a gradual pace of rate hikes, likely until policy turns restrictive. In other words, not accelerating the pace of rate hikes. For the latter, they would need to see an inflationary situation that is just not evident.

The Federal Reserve’s “r-star” Has Gone Full Supernova

My latest at Bloomberg is now up. We have been building up to this since Powell took the stage at Jackson Hole:

The Federal Reserve’s “r-star” has gone full supernova. New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned.

That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy. And it again highlights the importance of the incoming economic data. The Fed isn’t holding your hand anymore…

Continued at Bloomberg Opinion.

Monday Morning Notes: Fed Week

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.

FOMC Preview: Any Tilt In The Outlook More Likely Hawkish than Dovish

My latest on Bloomberg:

Most every market participant expects the Federal Reserve to raise interest rates another quarter percentage next week, the eighth increase since December 2015. And despite speculation the central bank may be close to slowing the pace of hikes, the reality is that while any changes to the Fed’s Summary of Economic Projections would be modest, they would likely reveal a more hawkish than dovish tilt…

Continued at Bloomberg Opinion.