21st March 2019
We’re guessing that after yesterday’s FOMC meeting Fed Chairman Jerome Powell is back on President Trump’s Christmas card list.
The FOMC left interest rates unchanged as expected. In every other respect the messaging from the meeting was markedly dovish. Both the statement and Powell’s commentary suggest the FOMC now has no intention of moving interest rates in either direction for an extended period – “Federal Funds rate is now in the broad range of neutral”.
The press release itself contained a number of notably dovish observations: “growth of economic activity has slowed from its solid rate in the fourth quarter”…”slower growth of household spending and business fixed investment in the first quarter”…”overall inflation has declined”…”the Committee will be patient”. These were further reinforced in the press conference where Powell drew particular attention to the slowdown in the European and Chinese economies.
Within the Q&A session Powell’s response to questions on the inflation outlook were interesting. Powell emphasised the need to avoid the Japanese and European disinflation trap and described low inflation expectations as meaning the Fed was paddling upstream to keep inflation up to their 2% inflation target.
This meeting completes perhaps the fastest FOMC volte-face on record, moving from extreme hawkishness in early October 2018 to extreme dovishness now.
All in all both President trump and his favourite measure of presidential success, the stock market, should be quite happy with the new fed tone.
11th March 2019
21st February 2019
Overall, these minutes appear to have been written to further calm the markets by signalling patience, flexibly and data dependence. The FOMC acknowledges that market volatility has tightened financial conditions at a time when global economic activity has shifted down a gear, primarily due to weakening global activity. Therefore, a more pragmatic approach to monetary policy is required.
It is clear from the comments they are aware that recent communication missteps exacerbated market volatility. The committee remains confident on the outlook for the US economy but, are now undecided as to whether the next policy shift will be a tightening or easing of monetary conditions.
We broadly concur with the FOMC’s assessment. The US economy looks to be in good shape while the risks are coming primarily from the European and Chinese economies. Interestingly, in the few weeks since this meeting those none US risks look to have shifted materially. Anecdotal evidence coming from corporates operating in China suggest that economy is holding up much better than was expected in Q4 2018. In particular, luxury goods companies have reported strong demand suggesting the much-discussed weak demand for Apple’s iPhones is more about Apple’s prices than Chinese demand. On the other hand, the outlook for Europe has continued deteriorating since January with notable signs of weakness in the German Industrial production data.
Overall our assessment of these minutes is the FOMC is shocked and chastened by the market volatility in Q4 2018 and is now likely to err on the side of easier policy for the foreseeable future.
A few of the more interesting passages from the minutes below:
“In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circum-stances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.”
Our translation: if it comes to a choice between inflation and employment, they are not going to damage the labour market for a few tenths of a percent on CPI.
“some market reports suggested that investors perceived the FOMC to be insufficiently flexible in its approach to adjusting the path for the federal funds rate or the process for balance sheet normalization in light of those risks.”
Our translation: We hear you!
“balance sheet normalization process should proceed in a way that supports the achievement of the Federal Reserve’s dual-mandate goals of maximum employment and stable prices. Consistent with this principle, participants agreed that it was important to be flexible in managing the process of balance sheet normalization, and that it would be appropriate to adjust the details of balance sheet normalization plans in light of economic and financial developments if necessary to achieve the Committee’s macroeconomic objectives.
Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.”
Our translation: Balance sheet normalization is no longer on autopilot and may be close to complete. This significantly reduces one of the market’s biggest concerns.
12th February 2019
Our recent posting, Beware the Mean Reversionists, showed how the current US growth spurt is unremarkable in terms of its longevity or impact and, even if it was an outlier, the current growth rate itself is average by historic standards. Of all 283 twelve-month rolling growth rates since 1948, the current run-rate is about midway.
When economies do slow dramatically it’s often down to debt. When households and companies overstretch themselves, they effectively experience an economic exhaustion. Growth slows when the private sector comes to realise it’s overspent and over-indebted.
When we look at the headline numbers in this respect, we are reassured. The US private sector is not as indebted relative to GDP as it was before the Global Financial Crisis.
Moreover, although some pundits have pointed to historically low unemployment as a limit to growth, there’s room for optimism.
The recession after the financial crisis, for a myriad of reasons, kicked a high number of participants out of the jobs market – a fall too steep to be driven by demographics alone. It’s not unreasonable, therefore, to assume that the participation rate - the percentage of the civilian population that make themselves available for work - could pick up meaningfully from here.
The global economic backdrop isn’t providing a tail-wind for the US right now, but headline data in the US at least doesn’t suggest the current growth spurt will die of old age.
8th February 2019
We’ve heard it said a lot recently that the US economy has peaked and, although the world isn’t without challenges, much of this argument hangs on the simple view that it’s had such a good run of late, what goes up must come down.
The Mean Reversionists, as we call them, generally assume that the longer the period of unbroken growth, the more likely it is to break.
We’ve looked at the numbers and, even if the Mean Reversionists are correct, the current US growth spurt really isn’t that remarkable in terms of either length or magnitude.
This chart shows US real GDP since 1947, with the duration of growth spurts (in quarters) on the horizontal axis and the increase in GDP (rebased to 100) on the vertical.
Given the economy stalled briefly at the start of 2014, the current period of unbroken growth (the blue line) is neither mature nor profound by historic standards.
To be fair the decline in 2014, as in 2011, was extremely small so being less purist with the data we also show the period from the end of the Global Financial Crisis to now (the dashed line). Although this growth spurt has a few grey hairs, it’s been very anemic by historic standards in terms of cummulative growth.
We’ll address some of the broader challenges in later blogs but for the Mean Reversionists, at least, the data doesn’t back up their argument.