FOMC sees the US economy as just right - Westpac

Elliot Clarke, Research Analyst at Westpac, points out that the FOMC Chair Powell appeared before the Senate’s Committee on Banking, Housing, and Urban Affairs overnight in part one of his Semiannual report to Congress and his message on the economy was clear: “the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate”.

Key Quotes

“In his prepared remarks, Chair Powell showed no particular concern on inflation. It was noted to have been “a little above 2 percent” recently, but this was due to “a significant increase in gasoline and other energy prices”. Looking forward, the symmetric nature of the “2 percent objective” was (again) highlighted, with the FOMC said to only be “concerned if inflation were running persistently above or below our objective”.”

“Nominal wage gains were also viewed as sanguine for the inflation outlook.”

“While employment growth continues to run well in excess of the level necessary to keep the unemployment rate unchanged (at or below its full employment level), the FOMC does not expect this benign state of affairs to end soon.”

“The primary reason why is the case is that, while it is rising, prime-aged participation still remains well below its pre-GFC level.”

“Comments on the yield curve were also non-threatening, with the only reference being that Chair Powell regarded long-term rates as a useful input when assessing neutral rates. A narrowing 2-10 Treasury spread is unlikely to unnerve the FOMC.”

“The risks to watch more closely then are those tied to the real economy, particularly current trade tensions. Most notable from the Q&A was the comment from Chair Powell that the FOMC had evidence of capital expenditure plans being “put on ice” owing to uncertainties around trade. This builds on previous comments found in the Beige Book and minutes on this issue.”