Taking the Shine off
The dovish hike that the Fed manufactured last week continues to calm the savage hawks that were circling around the concept of a more aggressive Fed. From our perch, we have to give the Fed kudos in providing itself with the most flexibility possible, including full optionality for an additional one to two hikes this year. The market’s key takeaways have been the lack of “dot” creep within its projections, with median expectations remaining unchanged for two additional hikes in 2017 and an additional three in 2018. The March meeting also included an update to its economic projections, which also showed very little change in outlook, essentially signaling that the economy was evolving as expected. Within the policy statement itself, the key points indicated that the economy was moving along as expected with a strengthening business environment. Inflation was also headed in the right direction, although core readings were generally stable, thereby indicating a lack of urgency on the Fed’s part. In framing the path of future rate hikes, as long as supportive financial conditions continue and data improves as expected, the Fed will move along its prescribed path, which remains accommodative and gradual. It did add the term “symmetrical” to its inflation discussion, hinting that inflation can run hot before the Fed feels compelled to change its outlook. The presser was much the same, with Yellen presenting a wait and see attitude with regard to any economic developments that may arise from policies emanating from the Trump administration. The broad message we interpreted is that normalization of monetary policy continues, with very little rush to change what the Fed views as a continuation of highly accommodative policy. While economic data may justify a more aggressive view later this year, current data indicates to us a Fed comfortable with an additional hike before mid-year and then waiting till later in the year before considering another move. This three hike view has become our base case, with a more aggressive position requiring survey measures of core inflation moving up sharply before the Fed contemplates deviating from its defined plan.