Letting the Data do the Talking

To little surprise, the Federal Reserve hiked interest rates by 25 basis points following today's meeting. Of much greater note are the hawkish changes made to the text of the Fed's statement (and with no dissents), as well as changes in the forecast materials. While these changes are clearly in line with the continued improvement in economic data over recent months, it's a positive development from a Fed that has been exceedingly cautious over recent years in upgrading its outlook on the pace of rate hikes.

Starting with the text of the Fed statement, stronger language related to rising economic activity and the continued decline in the unemployment rate was paired with the removal of long-standing language that noted the below-target inflation we have seen over recent years. Looking forward, language on "adjustments" to monetary policy have now become "increases...consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective".

A look at the updated projection materials (the dot plots) gives some insight in why the wording changes were made. The Fed's real GDP growth forecast was revised higher to 2.8% for 2018 (we expect growth will be at or above 3% this year, the fastest annual growth since 2005) - up from 2.7% in March and 2.5% at the December 2017 meeting – though projections remained unchanged for both 2019 and 2020. Inflation forecasts also moved higher for 2018, to 2.1% from 1.9%, and is expected to remain at 2.1% through 2020. The forecast unemployment rate was revised lower for 2018 to 3.6% from a previous forecast of 3.8%, while both 2019 and 2020 now show forecast unemployment of 3.5%, down from 3.6%. So across to board, changes point to improved economic conditions that justify higher rates.

During the press conference, Chairman Powell took time to reiterate, on multiple occasions, the strength of both the economy and the labor market. And when asked about concerns the Fed has related to recent trade and tariff talk, we were glad to hear that they will let the data do the talking. In other words, don't expect harrowing headlines or doomsday scenarios from the pouting pundits to change the Fed's outlook. As with so many other events over recent years, levels of media coverage are a very poor predictor of actual impact when the day is done.