Fed Maintains Rates

Heading into this rate decision, I expected a hawkish hold. At this point in the cycle, any meeting that doesn’t have a hike is expected to have hawkish language. Probably in 2019 or 2020, the Fed will turn off the spigot of rate hikes, but not yet. As expected, we didn’t get a rate hike. The unexpected part, in my opinion, was the slightly dovish statement which tempers the chances of 4 rate hikes this year. The market had drifted in that hawkish direction because of the increased inflation pressures even though economic growth hasn’t been as high as expected. Fewer rate hikes could extend this business cycle into 2020 as the yield curve remains normal.

Specific Changes To The Fed Statement

Let’s review the changes made to the statement to determine if there were new changes to the FOMC’s guidance. The first change states jobs growth has been strong on average. The “on average” part was added. This reflects the recent lumpiness of the figure as there were only 103,000 jobs added in March which missed estimates for 185,000 jobs added. Essentially, the Fed has made the change to be more statistically accurate without changing the implications behind the statement.

The next change made is that the Fed thinks business fixed investment has continued to grow strongly. That’s a hawkish change since anything positive about the economy signals more rate hikes are possible. The S&P 500 firms reporting earnings seem to be suggesting they are plowing the capital they got from the tax cut into capex. That’s a great sign for improved business fixed investment growth for the rest of the year. On the negative side, the private nonresidential fixed investment grew 7.3% in Q1 2018. While that is reasonably strong, the Q4 growth rate was 7.7%. That doesn’t justify an upgrade in the evaluation of business investment growth.

The next change is the point that the core inflation has come close to the Fed’s target instead of staying below the target. This is simply pointing out the changes in the data. The Fed’s goal has basically been met for the time being. Investors need to realize that the core PCE has been above the Fed’s target this expansion, but it hasn’t stayed above or at the target for any sustainable time period in the past 9 years. Specifically, the core PCE growth stayed above 2% for 4 months in 2012. High inflation is actually a terrible thing so I wouldn’t be rooting for higher inflation if I was a bull. I won’t be worried about core PCE unless it hits 2.5% which is unlikely for the next few months.