FOMC Verdict: A Less-Hawkish Jerome Powell Is Not Dovish


Wednesday, December 18, 2018 was a day that could have marked a turning point for the Federal Reserve and Fed Chairman Jerome Powell in the quest to raise interest rates. After having fed funds at the zero level (0.00% to 0.25% actually) from the end of 2008 through the end of 2015, the effective fed funds rate had risen to a range of 2.00% to 2.25% prior to Wednesday’s Federal Open Market Committee (FOMC) announcement.

The decision to hike could have gone either way, but Fed Chairman Powell and the voting members of the FOMC decided to raise interest rates to a target range of 2.25% to 2.25% from its prior 2.00% to 2.25% range. The vote was unanimous with 10 “yes” votes.

A first blush snapshot is needed here, particularly as the stock market gains ahead of the results quickly were taken back right after the FOMC statement and forecast. The median forecasts from the Federal Reserve members looks a tad less hawkish than he prior forecasts, but the FOMC did not mention the recent market volatility. This was all in all a less hawkish outlook by the Fed and by Powell, but it is not yet a dovish Fed at all.

As a reminder, it was just a month earlier where 24/7 Wall St. signaled that even a slightly less hawkish view from Jerome Powell was classified as him “blinking with a third mandate” from in the lights of the market. Unfortunately, stocks had continued their slide since then before the last two days of rallying.

What the investing community and consumers will want to know is if the FOMC is dialing down its rate hike expectations for 2019 and beyond. After all, the market volatility signaled a lot of the jitters that are in the economy — and economic growth readings have been slowing down in the United States and in the international economic reports.

Jerome Powell and his members of the FOMC have signaled that the balances on the economy are roughly balanced with some gradual rate hikes being needed ahead. The crux of Wednesday’s official FOMC’s “less hawkish but not dovish” statement was stated here:

The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.  The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

As if the markets needed more uncertainty over the Federal Reserve, there has been a lot of attention about President Trump’s tweets and public comments to the media that were critical of Jerome Powell’s continual pace of interest rate hikes and even calls to slow down the unraveling of the Fed’s massive balance sheet.

In a separate supplemental data release, the FOMC’s median fed funds rate for 2019 was 2.90% versus a prior 3.1% rate. Its target for 2020 was just 3.1% rather than 3.4%. That implies only two more rate hikes rather than 3 more rate hikes this coming year.

The FOMC’s median target for GDP growth was to go from 3.0% in 2018 down to 2.3% in 2019, then 2.0% in 2020 and ultimately 1.8% in 2021. Those September forecasts had been 3.1% for 2018 and 2.5% for 2019, but they were the same for 2020 and 2021.

The Core PCE inflation target for 2019 was also lowered down to 2.0% from 2.1% while the broader PCE inflation target was stuck at 3.1%.

Unemployment was projected to drop to 3.5% in 2019 versus 3.7% in 2018, flat versus the September forecast. The median target for 2020 was for unemployment to be 3.6% from 3.5%.

Societe Generale’s Omair Sharif, Senior Economist, said ahead of the Fed decision and statements on their outlook ahead:

In short, it seems like there is a good chance that the longer-run unemployment rate projection will come down from 4.5% to 4.4%, if not 4.3%… There has been a subtle but dovish shift lower in the longer-run unemployment rate projections this year, and that, combined with only modest inflation, leads us to believe that we will see this figure come down tomorrow…. Additionally, the longer-run funds rate projection could fall from 3.0% to 2.9% given the low hurdle for it to drop.