Macro Commentary
Let there be no doubt. The upcoming meeting of the Federal Reserve on March 14-15 has been the most telegraphed policy meeting in recent memory. Instead of the typical guesswork before hearing the conclusions of the data-dependent central bank, this time policymakers drove towards a single conclusion. Comments by Chairwoman Janet Yellen started by saying interest rate hikes are coming “fairly soon” in February to observation that they are “likely appropriate” in March. The market saw the trending language and started pricing in a near certainty of action this month despite the fact that this meeting has no associated press conference. Today’s employment report, the last major report before the decision, did nothing to change the consensus. So it looks like the Fed is stepping in.
So now the real question is how often the Fed will act this year. Expectations started in 2017 for three interest rate increases, though we should note that the same was true going into both 2015 and 2016 each of which ended with a single hike. The game has changed at this point, however, with the new Administration’s pro-deficit policy proposals which have pushed up inflation expectations. Clearly, with expectations up and the recent trailing inflation readings looking firm, the Fed is looking to prevent a problem. That said, it is a delicate balance. Economic downturns are often triggered by monetary policy tightening as they look to cool an overheated economy. While forthcoming fiscal policy is likely to be inflation-boosting, the timing of those policies looks to be pushing off. The “repeal and replace” process on the Affordable Care Act (ACA) was originally anticipated to be swift clearing the way for early discussion on tax reform and possibly infrastructure. At this point, the ACA discussion is taking time and may not reach a point of consensus for action until middle 2017 at the earliest. Then, the upcoming debt ceiling (i.e. the legislated limit on US Treasury issuance) becomes an issue and will have to be addressed pushing debate on tax reform until later this year with the impact of any changes likely falling to 2018. The data that the Fed must monitor looks to be as much the timing of their fiscal policy cousins as much as it is the traditional economic metrics to avoid doing too much too soon.