It’s commonly said that “actions speak louder than words,” and in most cases that would seem to be a sensible statement. It is often related to the idea that people should “watch what I do, and not what I say” as a guide to the most authentic representation of where one’s priorities lie. However, in our view, today’s Federal Reserve meeting was more important for what it said than for what the FOMC did policy-wise.
Indeed, in today’s FOMC statement and at Chairman Powell’s subsequent press conference, the Fed moved the funds rate range another 25 basis points higher, in what was widely anticipated as the next step in the Fed’s normalization path. That action wasn’t very revealing, or surprising. The actions of adjusting the Committee’s projections of economic growth from 2.8% real GDP growth in 2018, and 2.4% in 2019, to 3.1% and 2.5%, respectively, was also not terribly surprising or influential for markets, and is in-line with what today’s economic conditions are telling us about the near-future. The Committee largely left its projections for inflation unchanged since June, at near its 2% target for the immediate future.
The Committee’s dot plot (SEP projections) was somewhat interesting, given that it remained largely unchanged, except with a modest increase for the long-run time horizon. Yet, one must consider that the dots are merely a depiction of very disparate processes by the members who submit their views, and the anonymity of the data points can give very unclear readings of whose dot is where, especially given that some dot-providers are “more equal than others,” while also at some meetings like this one, the individuals providing projections change. Thus, what all this tells us about future rate projections can merely be a reflection of new dot-processes coming into the equation.
As a result, we think words today spoke louder than actions in the Committee’s statement. The decision relative to the word “accommodative” gives us a revealing lens into where the Fed’s disposition is today, and in the near-future, regarding growth and inflation projections. The fact that they took the key sentence containing the word accommodative out of the statement suggests that the Fed may actually believe it is now approaching a neutral level of interest rates. While we know today that the Fed did (and should have) raised policy rates by 25 bps, and is very likely to again at its December meeting (as evidenced by the near-term dots, and consist with the Chairman’s comments at the press conference), it is when and where they stop raising rates that we think is much more interesting for markets and longer-term interest rates.
We do believe that the Fed’s rate-hiking path will be influenced by the U.S. economy leveling off next year, by global economic conditions (including the U.S. dollar), by tariffs and trade impacts, and by how much inflation actually accelerates in the year ahead. The fact is that the new economy evolving today is replete with technology-driven goods-sector disinflation and that will mean that the neutral rate of interest, and the desire to go much above it, will likely be muted. So, in our view, the Fed will probably only tighten a couple of times, or so, next year, versus the consensus expectation of three or four hikes in 2019, which we think could be excessive.
It was the words in the statement, or rather those that were left out, and what the Chairman uttered at his press conference that signals the Fed’s willingness and ability to react to changing conditions, in our view. As his comments about being symmetric on policy, as we are now far from the zero bound, and remaining sensitive to global conditions, would seem to indicate. That means that the Fed’s path of rate hikes is real in the short-term, and predictable; such that those actions don’t tell us much that is new today, and possibly in December. Yet, it was the words that we received today, and which will likely follow over the coming weeks and months that will determine how far this Fed is willing to go to be preventative of a potentially overheating economy.
Further, their decisions will clearly influence some of the near-term softness in interest-rate-sensitive parts of the economy, such as housing, autos (through auto finance), and small business lending. Our guess is that today’s words, and this Fed’s high degree of pragmatism, will suggest a desire to go slow and be reactive to all conditions in the domestic (and tangentially global) economy, and the Committee will likely be deeply sensitive to what its words and future actions may do in a world where the future is more unpredictable: post-QE, post-tax-bill-induced stimulus, post-mid-term elections and potentially changing political conditions, and what impact all those factors will have on future employment and inflation conditions.
Rick Rieder - Chief Investment Officer Global Fixed Income - BlackRock