Fed Policy: Soft Landings Are Hard

The Federal Open Market Committee is widely expected to raise the federal funds target rate on Wednesday (to 1.50-1.75%). For investors, the key question is the pace of tightening that will follow. We should get some clues in the wording of the policy statement, in the revised Fed projections (including a refreshed dot plot), and in Chair Powell’s post-meeting press conference. Monetary policy decision will certainly remain data-dependent. However, markets are likely to price in 25 basis points per quarter. Looking further ahead, pegging the rate of growth to a sustainable pace will be a difficult task.

Scott Brown
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In late 2015, Fed officials generally expected to raise short-term interest rates a number of times in 2016, but moved only once. Then-Chair Yellen later indicated that low inflation readings and signs of a tentative slowing in job growth left the FOMC more cautious. While not on a preset path, the Fed raised rates once per quarter in 2017 and seemed set to continue, except for September. Hurricanes Harvey, Irma, and Maria had a significant impact on economic activity. The Fed anticipated a rebound from hurricane effects in 4Q17, but the lull allowed it a safer backdrop to begin its balance sheet unwinding (policymakers were unsure of whether the financial markets might over-react to the initial steps). The bottom line is that the central bank had a couple of excuses for taking a break from the 25-bp per quarter pace of tightening.

The economy was expected to show strong momentum at the start of 2018, with increased uncertainty building in the middle of the year (reflecting the convergence of fiscal stimulus, tighter monetary policy, and job market constraints). Surprise! Most of the major economic data reports for January and February (including retail sales) were on the soft side of expectations, leading to a general decline in economists’ forecasts of 1Q18 GDP growth. Much of that may be weather-related. Expectations for the remainder of the year remain strong.