On the Middle Ground Stands Mr. Powell

By SNW Asset Management via Iris.xyz

“We are trying to take the middle ground,” said Fed Chairman Jerome Powell when asked about his rates strategy. No surprises and no drama during his first news conference after last week’s Federal Reserve Open Market Committee (FOMC) meeting. Indeed, Mr. Powell found the middle ground between the doves and the hawks.

Last week the FOMC increased the Fed Funds target rate by 25 bps to 1.50-1.75%, and the committee indicated the Fed Funds rate is on a higher track as the economic outlook has strengthened. The committee predicts 3 hikes this year and 3 rather than 2 hikes for 2019. GDP growth is now expected to be 2.7% in 2018, up from an expectation of 2.5% as recently as December, and the unemployment rate is expected to fall to 3.8%, slightly lower than the previous forecast of 3.9%.

This rate would be the lowest since the 1960s and well below the Fed’s revised 4.5% estimate of full employment. Even inflation is expected to be a little higher, as the 2019 forecast for core PCE inflation was increased to 2.1% from 2.0%. This is a tiny increase, but important as the Fed is signaling it finally expects inflation to rise above its 2% goal.

Of course, Fed expectations and projections are data dependent, including for the course of inflation, slack in the economy, and other items like the impact of trade policy.

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