So, here's the paragraph that shows basically nothing has changed in terms of the Fed's autopilot stance. The bulk of the committee is committed to the idea that continuing to hike gradually is the right course because it saves them from having to hike swiftly.
It does not appear that fiscal policymakers agree with the need to "build additional resilience in the financial sector at this point in the economic cycle."
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Translation: the Fed was the economy's nurse, now it's shifting into a role as the economy's security guard.
The Fed sounds like it believes the data have vindicated its 2017 stance on inflation, even though the softness in price pressures last year was more broad than just a big Verizon effect.
nteresting that the Fed thinks that the market's *lower* estimates of the long-run neutral rate are contributing to the flatness of the yield curve. Ahead of this meeting, the five-year forward one-year rate -- which SocGen strategist Kit Juckes uses as a proxy for the market's estimate of the terminal rate -- had been moving higher. This metric proceeded to hit its highest level since 2014 earlier this month. Read more here:
All in all, the Fed's individual statements on the flattening yield curve (most notably Bostic's claim that it's "his job" to prevent an inversion) seem much more alarmist than the collective view. Basically, as a group, they agree to keep an eye on it, that there are a lot of reasons why it's flat, and that it might not be as powerful a signal now as it has been in the past.
So -- here the Fed is highlighting stock effects (its own balance sheet) and flow effects (spillovers from ECB QE) as potential contributors to the flatness of the yield curve. Some thoughts: Aren't markets supposed to be forward looking enough to have incorporated what the Fed has targeted in terms of balance sheet reduction into long rates? And over in Europe, does the moderating growth implied by recent PMI prints along with the political hijinks in Italy raise the odds that this source of downward pressure endures?
Seems like Janet Yellen's theory that a negative term premium distorts the strength of the economic signal provided by the yield curve lives on inside the Fed even though she's gone.
If the Fed staff is going to keep using 2017 as a benchmark for implied equity volatility, it's going to appear elevated for a long time. Eighty five percent of all VIX closes below 10 occurred in calendar year 2017!
One metric that highlights this difference between the "neutral" rate and the Fed's estimate of the long-term policy rate is the Williams-Laubach model, which is below where it was in the third quarter of 2016 and barely in positive territory in real terms.
However, to a certain extent, that metric hasn't passed the smell test of late. That's in stark contrast to what we've seen in the labor market: stronger headline payroll growth, which implies a higher growth rate for labor input (and in turn, potential growth and the neutral rate).
John Williams brought this up recently in an interview with our own Jeanna Smialek, and the issue was also raised in the minutes of the March meeting.
Read more here:
"Several" officials are seemingly confident that Janet Yellen's major call on the labor market -- that running it hot could bring in would-be workers from the sidelines -- still has legs. However, inflows into employment from outside the labor force have been trending downwards recently.
Interesting tidbit on inflation: companies seem to think they have more breathing room to raise prices without losing that many customers when (to oversimplify) gas prices are rising.
The data make clear why this is a healthy debate inside the Fed: inflows from "not in the labor force" to "employed" appear to be plateauing or rolling over. The increase in this metric has been a key component behind why payroll growth has been able to remain high without a big pickup in wages.
Naufal Sanaullah at EIA All Weather Alpha Partners notes that it's a "good sign" that the central bank appears to be focusing more on the impact tariffs will have on growth (to the downside) rather than inflation (to the upside). The inference is that they'd look through any one-time price shock.