Powell Steps to the Plate

The Federal Open Market Committee met this Tuesday and Wednesday, the first under the Chairmanship of Jerome Powell. More than one pundit commented that this was to be one of the most momentous FOMC meetings in recent memory. The situation Powell has inherited – fiscal stimulus, volatile markets, questions of international trade – is substantially different than what Chair Janet Yellen had in her last press conference (though not last FOMC meeting) in December.

I appeared on CNBC in the hour before the Fed’s announcement and Chairman Powell’s press conference, and I said that his goal should be a non-event: he should strive to be very clear as to what the Fed has done, but he should also be clear that any future decisions will be made in light of future conditions. Powell’s task was to be clear so the path of monetary policy has as little ambiguity as possible; there is ambiguity enough in a $20 trillion economy.

In that respect, the opening of the Powell era was exactly the non-event that should soothe the markets, and especially the long term investor. As for actions, the Fed Funds rate was raised by one quarter of a percentage point, the sixth such incremental step in the gradual removal of policy accommodation since the end of the 2015. In his press conference Powell answered questions directly. Instead of deflecting questions about future policy steps, Powell answered clearly that future decisions will be made upon reflection of future conditions. He indicated the gradual path towards normalization will continue as long as current general economic trends continue.

Along with the press release, the Fed issues the Summary of Economic Projections, or SEP. The SEP compiles projections for key economic indicators for each Board member and Bank president. The SEP also compiles each individual’s assessments of projected monetary policy. It is poured over, parsed, and dissected as if the SEP were a Greek oracle with secrets of the future to be divined. The truth is, it is always worth looking at because the Federal Reserve employs very sharp economists who collect huge amounts of data to make their projections. This time around, the SEP revealed predictions for stronger economic growth (real GDP increase of 2.5-3.0%) and lower unemployment (3.6-4.0%) this year, while inflation is expected to remain low (core PCE of 1.8-2.1%). As to what the Fed members project as the appropriate path of interest rates, the median is for two more rate increases in 2018 for a total of three. However, in his press conference, Powell was clear: “We made one decision. The projections are forecasts and they will change over time.” In other words, no decisions about future increases have been made yet.

The market reaction was, in the end, muted. Initially, stocks went up as the press release and SEP were seen as more “dovish.” It seems many traders were betting on four rate increases this year, and so a projection of three may have led to some repositioning. As Powell’s press conference got underway, certain comments were interpreted as “hawkish”, meaning that the Fed may be inclined for more aggressive tightening. in response to such comments, the equity markets backed down from their highs. Yet by 3:30, the markets were almost exactly where they had been at midday: a non-event.

Jay Powell’s first time in the spotlight was a success: he said plainly “we are committed to communicating as clearly as possible.” He certainly did that. Looking forward, we remained concerned about the slow pace of wage increases, high asset prices, economic inequality, ballooning deficits, the potential for trade wars, and a flattening yield curve. However, surprises from the Fed are not on the menu just yet.

That interest rates are moving higher is clear. “Don’t fight the Fed” is among Wall Street’s most important adages. Our clear investment discipline and dogged research will continue to guide our investment process. Emotion is the enemy of the long-term investor.