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June 18,19, 2019 FOMC Meeting

In a Nutshell:  “… uncertainties about this outlook have increased.”

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

The Fed kept interest rates steady today, but signaled a rate cut could be coming. 

The view of economic conditions was largely unchanged from the last meeting, when the FOMC indicated it would remain “patient” when it came to determining the direction of policy.  While investment was viewed as “soft”, consumption “picked up”.  That is largely a wash.  Labor market conditions were still considered to be “strong”.   And, the forecast for 2020 ticked up a little, form 1.9% to 2.0%.  So, it can be said that if the Fed was signaling weakness, it had little to do with the economy.

What did change was the categorization of inflation.  The statement noted that “Market-based measures of inflation compensation have declined…” It also stated, in the context of its views on both growth and inflation, that “uncertainties about (the) outlook have increased.”  Therefore, the Fed, instead of being patient, will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion…” 

Despite the lack of data pointing to a weak economy, of the seventeen board and bank presidents who provided forecasts, eight expect the funds rate to be cut this year and seven think it will be reduced twice.  On the other hand, eight think that rates will not change this year.  In addition, while only one member thought there would be rate hike this year, three expect it to go up next year!  That is a pretty fractured Fed. 

My problem with the statement and the forecasts is that taken together, they are inconsistent.  Why signal that rates need to be cut when growth might actually be a little better than expected and in any event, is not showing signs of faltering?  And do those who want to ease really believe that a half point reduction in the funds rate will cause inflation to accelerate?  I am not sure what model would show that.

If inflation is the great concern, which it appears to be, then it is likely to take a lot more than 50 basis points to drive up inflation significantly.  It is not as if growth has been weak over the past year.  However, it doesn’t look as if the Fed is prepared to go that route. 

So why did the Fed signal a rate cut could be coming in the near term?  The only explanation I have is that the markets told them to say that.  A failure to remove the word patient from the statement could have been greeted quite negatively by investors.  So the Fed gave the markets what they wanted – for now. 

Ultimately, though, the data will prevail.  If the economy is as decent as I think it is, it will be hard for the Fed to cut rates without further declines in inflation, even if a growing number of members are no longer patient.  (The next FOMC meeting is July 30-31, 2019.) 

May Import and Export Prices and Weekly Jobless Claims

KEY DATA: Imports: -0.3%; Nonfuel: -0.3%; Exports: -0.2%; Farm: -1.0%/ Claims: +3,000

IN A NUTSHELL:  “Maybe the Hubble telescope can find inflation, but I can’t.”

WHAT IT MEANS:  Well, another inflation number, another sign that inflation is going nowhere.  Import prices fell in May.  We knew that energy costs were down, so the drop was hardly a surprise.  What was surprising was the broad based nature of the decline in the costs of imported products.  Food, non-petroleum industrial supplies, capital goods and vehicles all posted negative numbers.  The only outlier, if you can really put it that way, was consumer products, which were flat.  In other words, prices of all the major products groups were either flat or down in May.  Part of the drop comes from the strong dollar, which has started to slip.  But it could be months to see any change.  Also, tariffs are not part of the imported goods price.  They are paid by the importer based on the cost of the imported product.  On the export side, we saw a similar pattern.  Almost every category posted declining prices, with agricultural products leading the way.  Farmers are suffering the most from the trade war and loss of markets and we see them in the prices, which are down by 4.6% over the year. 

Jobless claims rose a touch last week, but as usual, that is hardly anything to worry about.  The number may not be at historically low levels, but it is not that far away. 

MARKETS AND FED POLICY IMPLICATIONS:  There are all sorts of cries for rate cuts, but don’t expect that to happen soon.  While inflation may be below target, growth and the unemployment rate are not.  Could the Fed lower rates and not risk igniting inflation?  Maybe a little, but what good would one or two cuts do?  Long rates have already plummeted and there hasn’t been any major uptick in housing sales.  And its not as if businesses don’t have the capital or the tax incentives to invest already.  Will they really decide to increase capital spending if short-term rates go down?  Wouldn’t rate cuts send the message that the Fed is worried about growth? What would that say about the prospects of stronger growth going forward that would be needed to make the investment profitable?  And if the Fed does lower rates and it accomplishes little other than supporting the equity markets, as I suspect it would, there would be even fewer arrows in the Fed’s quiver to fight the next real slowdown.  We will get some information abut the Fed’s thinking from next weeks FOMC statement and the Chair’s press conference, but I am not sure there is a whole lot of consensus on the Fed.  Its not as if the economy is falling off the cliff, even if second quarter does come in low.  My view is that a rate cut now is not needed and it would only be done to satisfy the lust in the equity markets, and that is just not good enough.   The Fed should stick to dealing with its dual mandate and skip the Jerome Powell created third one, maximizing equity values.    

May Private Sector Jobs, Non-Manufacturing Activity and Help Wanted OnLine

KEY DATA: ADP: 27,000; Construction: -36,000; Small Businesses: -52,000/ ISM (Non-Man.): +1.4 points: Orders: +0.5 point/ HWOL: -2.3%

IN A NUTSHELL:  “April’s employment surge may have been an aberration as May is looking a lot softer.”

WHAT IT MEANS:  When the April jobs report showed that 263,000 new positions were created, I warned that this might be just one of those temporary blips that we get in the data and that May’s number could be a lot weaker.  Well, we will know for sure on Friday, but the ADP estimate of private sector job gains seems to point to that being the case.  Businesses added few new workers in May and the details were pretty gruesome.  Small business payrolls shrank dramatically.  It’s not just that smaller companies cannot compete on wages in a tight labor market but the changing structure of retail demand is putting a lot of them out of business.  That said, there was only a minimal gain in mid-sized company payrolls, so not a lot of firms are finding it easy to hire.  There was also a huge drop in construction workers, but that came after a strong gain in April. 

Supporting the possibility of a disappointing May jobs report was a solid decline in the Conference Board’s Help Wanted Online Index.  Every region and almost every state posted lower online ads for workers.  Similarly, reductions were seen in almost every occupation category, so you can say this was an economy-wide issue. 

While the job market seemed to falter in May, the nonmanufacturing portion of the economy continued to do okay.  The Institute for Supply Management reported its index rose as new order growth accelerated. Business activity in the service and construction segments of the economy improved quite solidly.  Unlike the other surveys released today, the ISM employment index rose.  The in the non-manufacturing segment, however, stands in contrast to the May manufacturing report, which declined, led by a sharp shrinkage in order books.  That does not bode well for future production.

MARKETS AND FED POLICY IMPLICATIONS: All eyes are on trade discussions, but the tariffs and threats of additional tariffs may already be starting to have an impact on growth.  I don’t expect the jobs report to come in at double digits, but a low triple-digit May jobs number is a real possibility.  That would bring the average for the three months close to expectations and show that the April number was foolish.  But given the equity markets’ sensitivity to any weak number, it could create an outsized impact.  Investors are counting on the Fed to bail out the economy but they are fooling themselves.  The Fed has limited ammunition to fight a slowdown.  Let’s face it, if the Fed has to go below one percent again, it will be in trouble.  The only reason to go that low is if the economy is in deep trouble and not a lot of businesses will be making major capital spending decisions or households buying big-ticket items under those circumstances.  Interest rate cuts would have limited impacts.  The Fed has a little more than one percentage point of rate cuts before it effectively runs out of ammunition. It would need a lot more than that to turn around a faltering economy.  And with the U.S. budget deficit nearing one trillion dollars, fiscal policy is in a straight jacket.  So we better hope that a major slowdown doesn’t occur anytime soon or to quote George H.W. Bush, we will be in “deep doodoo”.      

April Spending and Income and May Consumer Sentiment

KEY DATA: Consumption: +0.3%; Inflation-Adjusted: 0%; Income: 0.5%; Real Disposable Income: +0.1%; Inflation: +0.3%; Excluding Food and Energy: +0.2%/ Sentiment: +2.8 points

IN A NUTSHELL:  “It’s nice that income gains were strong, but it would be a lot better if more of the rise came from wages increases.”

WHAT IT MEANS:  The consumer remains the key to continued solid economic growth.  Do households have the wherewithal to keep spending?  Not as much as you might think.  Personal income soared in April, which was the good news.  The disappointing news was that wage and salary gains were not the driving force.  Yes, they were up decently, but it was a surge in interest income that created the jump in personal income.  It is not clear that consumers will be spending the interest surge or even how that rise was created.  As for consumption, a improving spending on nondurable goods demand offset the disappointing drop in vehicle purchases.  Adjusting for inflation, consumer spending was flat.  Still, given the enormous surge in demand in March, consumption looks on track to grow by at least two percent this quarter.  That may be the only thing that keeps the second quarter GDP number from being truly bad.  Speaking of inflation, the headline and core (excluding food and energy) numbers ran a bit hotter than they had been.  Over the year, though, both measures remain in the 1.5% range, which is well below the Fed’s 2% target.  As long as inflation remains in check, the tepid rise in wages should be enough to keep spending up.  And the rising savings rate means that households have some insurance if the economy falters. 

On the consumer confidence front, households remain exuberant.  The University of Michigan’s May Consumer Sentiment Index rose from the April reading but was down from the mid-month number.  The outlook for future growth rose sharply even as the view of current conditions faded a touch.  How the future growth number will react to the introduction of tariffs on Mexico will be interesting to see. MARKETS AND FED POLICY IMPLICATIONS:Headline numbers often mislead and the large gain in top line income growth was not indicative of what most workers are seeing.  Wage and salaries are what they watch and while compensation is growing decently, the percent change over the year has been steadily decelerating since August 2017.  The inflation-adjusted rise has been below 2% for the past year and that makes it awfully hard to sustain 3% overall growth.  The good news is that confidence has remained incredibly high.  The strong job market is driving that optimism but the view of current conditions may be on the downslide.  Over the year, Michigan’s current conditions index is now off.  A key number for second quarter consumption is May vehicle sales, which comes out next week. If we don’t see a major rebound from the April collapse, second quarter growth will likely be weaker than most economists had been expecting.  And then there is the announcement of tariffs on Mexican products.  This has to raise questions about not only the US-Mexico-Canada agreement but also the likelihood of an agreement with China.  If having an agreement doesn’t stop the U.S. from imposing tariffs on a country’s goods, why have an agreement at all?  Tariffs are now viewed by this administration as a cudgel to secure actions from other countries that may or may not have anything to do with fair trade practices.  That cannot be good news for investors who now have to worry not only when, but if a China-U.S. agreement will occur.  In addition, rising consumer and business costs due to tariffs on both Chinese and Mexican products can only slow growth further.   We have entered a period of major uncertainties and that cannot be good for the markets, which were already reeling from the Chinese trade war.  Can we really fight two trade wars at the same time?  We shall see.

April Housing Starts, May Philadelphia Fed Manufacturing Survey and Weekly Jobless Claims

KEY DATA: Starts: +5.7%; 1-Family: +6.2% Permits: +0.6%; 1-Family: -4.2%/ Phil. Fed: +8.1 points; Orders: -4.7 points/ Claims: -16,000

IN A NUTSHELL:  “The housing market is coming back a little, another sign the economy continues to expand at a decent pace.”

WHAT IT MEANS:  If you believe the bond market, where rates have been plummeting, you would think that the economy is in deep trouble.  But that is just not the case.  Housing starts rebounded in April, which really should not have surprised anyone.  The levels we had been seeing over the previous two months were way below where they should have been.  Why do I say that?  Because permit requests, which also rose, had been and still are running above the level of actual construction.  That had to change and there still is more to come.  For the past three months, permits have averaged nine percent more than starts, which means there is a backlog of construction that will likely be filled in the next few months.  In April, construction activity showed what was likely the effects of weather.  Starts skyrocketed by 85% in the Northeast and by 42% in the Midwest, but fell by roughly 5.5% in both the South and the West.  Wet weather may play havoc with activity in May, so any result should be viewed accordingly.  One issue for the economy that comes out of this report is that the number of homes under construction declined for the third consecutive month.  Building activity is what really matters for economic growth and right now, that is softening.

On the manufacturing front, conditions there may be firming a little as well.  The Philadelphia Fed’s survey of regional manufacturing activity jumped in early May.  Keep in mind, this measure is wildly volatile, so the surge we saw was not really out of the ordinary.  Indeed, the details don’t consistently argue that conditions are improving significantly.  For example, while employment improved a touch, new orders expanded at a less rapid pace.  Looked forward, expectations were largely the same, though firms are thinking that hiring may pick up.  As for inflation, which was in the special question section, firms say their prices may rise a little less than had been thinking in February, but that overall consumer inflation would run a little hotter. 

Jobless claims declined back to more typical, at least for this tight labor market, last week.   MARKETS AND FED POLICY IMPLICATIONS:  In a normal world, where it is all about the economy, concerns should be minimal.  However, this is not a normal world.  Fighting a full-fledged trade war with China and a shooting war with Iran at the same time should be enough to unnerve investors.  But it appears as if many don’t believe that will be the situation.  How else can you explain the cratering and unwinding of that decline that has occurred over the past week?  Maybe investors are starting to understand they are mere puppets and the strings are being pulled by the tweeter in chief?  I make that statement not because I think those risks are not real; I believe they are.  But at some point, you have to start seeing it to believe it.  And then you have to determine the extent to which the economy will be harmed.  Right now, it is all fear and little analysis, so expect volatility to hold sway. As for the Fed, the uncertainty plays right into its hands.Why do anything until you know what direction policy will take us?  The difficulty, though, is that economic data tend to tell us what happened or is happening, not necessarily what will happen.  Being data dependent in an uncertain world where the data – and the markets – can be whipped around is an awfully risky approach to take.

April Consumer Prices and Real Earnings

KEY DATA: CPI: +0.3%; Ex-Food and Energy: +0.1%; Food: -0.1%; Energy: +2.9%/ Real Hourly Earnings: -0.1%; Over-Year: +1.2%

IN A NUTSHELL:  “Inflation is neither too hot nor too cold, but for the Fed, it is hardly just right.”

WHAT IT MEANS:  Normally, news about inflation would take center stage and it should.  So let’s keep it there, even though there are now higher tariffs on Chinese imports.  Consumer prices rose solidly in April, but much of the gain came from a surge in energy costs.  Meanwhile, food prices dipped.  Netting out those two volatile sectors, prices rose modestly for the third consecutive month.  Over the year, both headline and core prices were up about two percent, so the Fed’s target has been reached, at least for this measure.  The details of the report were a bit odd.  Clothing prices cratered again, but there was a change in the data collection process, so maybe we should also exclude clothing.  And there was a large drop in used vehicle costs, but it is unclear why that is happening given all the vehicles coming off of lease.  Maybe we should exclude that too.  And while I am at it…  Okay, just kidding around.   Not really.  There is a serious point in saying we should exclude most components.  The Fed claims there are transient factors restraining inflation and we have to determine which ones they are referring to and how much of an impact they are having.  Right now, core – i.e., non-food and energy – prices rose at a less than two percent pace over the past three months.  How long will the Fed wait to see if the impacts are indeed transient?  The one factor that we can agree is not transient is the continued surge in housing costs.  Those should remain high for an extended period.

With prices up solidly but hourly and weekly earnings rising more slowly, real, or inflation-adjusted earnings fell in April.  Consumer spending power has grown about one percent over the year and that is hardly enough to support strong consumption growth. 

MARKETS AND FED POLICY IMPLICATIONS:  Today’s news on inflation may disappear in the uproar about the raising of tariffs on Chinese imports and the threats to broaden them to all Chinese products.  But consumer prices are something that need to be watched.  It’s not that inflation is likely to soar; there is little reason to believe that.  It is that the tariffs are passed through to consumers.  The tariffs affect only a small percentage of the economy, so the pass though of the costs should not raise consumer prices significantly.  But the impacts don’t fall evenly across income groups.  In addition, inflation-adjusted earnings are growing modestly and the combination of higher tariffs and slow spending power does not bode well for consumption going forward.  First quarter household spending was weak and April’s vehicle sales were really soft, so second quarter consumer demand may not be that much better.  Meanwhile, the tariffs only make the Fed’s job more difficult.  They slow growth but may raise inflation enough to keep it near the Fed’s target.  Yet any agreement would unwind those impacts, whipsawing the data.  With no clear idea where the economy and inflation are going, the Fed will likely stay on hold for a long time.   

April Producer Prices, March Trade Deficit and Weekly Jobless Claims

KEY DATA: PPI: +0.2%; Goods: +0.3%; Services: +0.1%/ Deficit: up $0.7 billion; Exports: +1%; Imports: +1.1%/ Claims: -2,000

IN A NUTSHELL:  “It looks like the big bump the economy received from a narrowing trade deficit in the first quarter will disappear in the spring.”

WHAT IT MEANS:  The events swirling around the economy continue to create chaos but economists still have to make sense of the economic data.  Wish me luck.  Let’s start with inflation, since that is the key to Fed behavior.  As long as inflation remains near the target, there is not likely to be any change in rates.  Well, that is likely to be the case.  Wholesale prices rose moderately in April, led by another sharp increase in energy prices.  Offsetting that, though, was a decline in food costs.  As a result, producer goods prices, excluding food and energy, were largely flat.  Since April 2018, business costs are up between 2% and 2.5%, depending upon which special index you look at.  As for the pipeline, there appears to be some pressure building in the cost of food.  Those higher prices tend to be passed through.  Still, given that the path from wholesale to retail prices is not straight and is often a dead end, it is hard to make the case that inflation will accelerate significantly due to rising costs of production.   That is especially true given that the trend in services inflation, which had been leading the way, is down.   

Meanwhile, all is not quiet on the trade front, even before the president made his threat to impose higher tariffs on Chinese imports.  The trade deficit widened somewhat modestly in March, in line with what would have been expected given the data in the GDP report. But while I don’t expect a major revision to the trade numbers for the first quarter, it looks like the narrowing we saw has largely disappeared.  At least in March, the numbers were actually heartening, despite the widening.  Both exports and imports rose, which is what should happen when the economy is strong and the rest of the world is growing.  On the export side, the soybean farmers were back in the market, as sales surged.  But that could change quickly if the tariffs are imposed.  Energy exports were also up.  On the other hand, aircraft exports cratered. As for imports, higher prices and growing demand led to a rise in demand petroleum-related productsIndeed, imports of just about everything else rose, the major exceptions being cell phones and televisions. 

Jobless claims remained slightly elevated, but there are few signs the labor market is weakening.    MARKETS AND FED POLICY IMPLICATIONS:The latest research makes it clear that consumers are paying the cost of the tariffs.  But the volume of goods being taxed is small given the size of the economy, so there is little pressure on prices.  That is likely to be the case if the tariffs in Chinese products are raised.  But the threats, their imposition, their relaxation, new threats and on and on just makes it impossible to determine where the trade deficit is going.  Clearly, given sufficient lead-time, firms will expand imports in the months before the tariffs are imposed and lower them afterward.  Just the threats change patterns.  With companies now making decisions on what to order for the holiday shopping season, the uncertainty over when and how much to order is heightened. If new tariffs do come on, as is likely to be the case, then firms could hesitate importing goods, hoping that the tariffs will be rescinded.  On the export side, the Chinese will be true to their word and respond in kind. I suspect the farmers are not a very happy bunch.  Since trade flows have been modified by politics, it is necessary to look at growth excluding this crucial sector.Trade added one full percentage point to growth and could add nothing or even subtract from growth this quarter.   That could help create an artificially low growth rate in the second quarter, just as it created an artificially high number in the second quarter.  As for inflation, there is no reason to think it will accelerate or decelerate, which is good news for the Fed.  Finally, while today’s data are important, the trade threats matter and until some of the fog of trade war lifts, uncertainty will likely drive investment decisions.  And that is rarely good for the markets.

March Retail Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: +1.6%; Vehicles: +3.1%; Gasoline: +3.5%/ LEI: +0.4%/ Claims: -5,000

IN A NUTSHELL:  “The economy appears to have thrown off some of the winter lethargy and is growing again at a decent pace.”

WHAT IT MEANS:  When in doubt, panic.  At least that seems to be the motto of those who worry about each and every data point released, such as most investors.  Even the Fed, in particular Chair Powell, seemed to have subscribed to that approach.  But as more level-headed economists argued at the end of last year, the market crash made no sense when the fundamentals of the economy were analyzed and now we are seeing that a “wait and see” approach was the right way to go.  Consumer spending rebounded sharply in March led by a jump in vehicle demand.  We need some time to see if the March vehicle sales were just a one-month wonder, but at least purchases didn’t fall off the cliff.  There was also a major increase in gasoline sales, but those were largely price driven.  Still, there was only major component, sporting goods/hobbies/musical instruments, etc. that declined and that was modestly.  Over the year, non-inflation adjusted sales were up 3.6%, a decent gain, though nothing special given the roughly 2% inflation rate.  With consumption rebounding, first quarter growth is likely to come in a little better than expected and it sets up a solid second quarter number.

The Conference Board’s Leading Economic Indicators index jumped in March, led by improving labor markets, expectations and financial markets. The Coincident and Lagging Indices rose modestly.  Still, as the report noted, “the trend in the US LEI continues to moderate, suggesting that growth in the US economy is likely to decelerate toward its long term potential of about 2 percent by year end.”  So, don’t look for robust growth coming anytime soon.

Jobless claims, incredibly, continue to drop.  The level is almost incomprehensible, given the size of the labor force and the dynamism of the economy.  There seems to be almost no turnover.  What makes this so weird is that wage gains have stabilized despite what appears to be a drum-tight labor market.MARKETS AND FED POLICY IMPLICATIONS:The Fed has tried to give itself an out by reiterating that a rebound in growth could make them rethink their stance.  I am not saying growth is so strong that the Fed will actually do that, but it is clearly not so soft as it believed it to be when it suddenly decided it would do nothing this year.  First quarter GDP growth should be in the 2% range but could be higher if inventories increase rapidly.  That would help the first quarter. But if, as believed, those additions to stock were unintended, it would pull down second quarter growth when firms push back orders so they can whittle down their excessive inventories.  That points the need to look at the trend in growth, not just the data on one quarter.  Of course, I raise the point of not giving too much credence to any one number constantly and that warning goes unheeded, but I will keep on trying.  As for investors, they should like today’s reports though a certain report may dominate the discussion.  

March NonManufacturing Activity, Private Sector Jobs and Help Wanted OnLine

KEY DATA: ISM (NonMan.): -3.6 points; Orders: -6.2 points; Employment: +0.7 point/ ADP: +129.000; Manufacturing:  -2,000/ HWOL: -1.6%

IN A NUTSHELL:  “There are more signs the economy is slowing.”

WHAT IT MEANS:  If there is one consistency in the data, it is that they are inconsistent.  We have gotten some good numbers this week, some iffy numbers and some disturbing ones.  Today’s data were somewhat weaker than expected.  Let’s start with the Institute for Supply Management’s NonManufacturing Index.  It came in lower than forecast.  That said, the level is still pretty solid, or at least points to continued moderate growth.  The details were a bit odd.  The overall index fell solidly, business activity and orders crashed, but backlogs and hiring improved.  Those results tend not to say the same thing.  What they seem to be implying is that there is a easing in activity but it is not spread across all segments of the economy.  Indeed, the manufacturing supply managers indicted that conditions were improving.  Conclusion:  Conditions are a lot more mixed than they had been.

With Friday being the day of the March employment report, today’s ADP estimate of private sector job gains was looked toward to provide some insight into the extent of the bounce from the February modest 20,000 payroll rise.  Well, it could be somewhat less than hoped for.  There were some concerns that popped up in this report.  First, the small business segment, which had been hiring quite solidly, appears to be shutting things down.  It is unclear whether that is due to softer demand or a lack of qualified applicants, but regardless, that is a critical component of job growth and right now it is lacking.  The second is the sharp slowing in manufacturing payroll gains.  I don’t know what to make of that as the ISM manufacturing survey pointed to a rebound in manufacturing employment.  I guess we will have to wait a couple of days to find out.

On the jobs front, the Conference Board’s Help Wanted OnLine index fell in March.  This index has become somewhat more volatile than usual and it may be due to temporary factors such as the government shutdown and the weather.  Of course, it could be due to uncertainty over the direction of growth, which would not be a good thing.  But just as the ISM nonmanufacturing index still points to solid growth despite its decline, the HWOL index decline only means that job growth should be good not great.MARKETS AND FED POLICY IMPLICATIONS:So, where is the economy going?  Good question.  The yin and yang of the numbers makes it clear that the year of tax-induced solid growth is over.  But growth is still decent.  Indeed, yesterday’s surprising report that vehicle sales popped in March provides some hope that the slowdown is bottoming.  My first quarter GDP number has been 1.8% for a few months now and I am sticking with that.  But I also expect the second quarter to bounce back up to around 2.5%.  Taken together, that means first half growth will likely come in at about 2.25%, which is where I have growth for the year.  Is that bad?  Not at all – it is trend growth or maybe even a touch higher.It’s just the expectations we will get 3% growth for the next decade were overblown as we will probably see that level (or close to it), for only one year.  That is not even good for government work, but the administration’s economists at the Office of Management and Budget tend to be politically directed.  Instead, we are seeing something closer to the nonpartisan Congressional Budget Office economists’ forecasts, which mirrored the private sector forecasts.  As for Friday, I think we will be in the 160,000 to 175,000-range.  That would put the three month average also in that range, which is where it should be.  That is not so strong or weak that the ad-libbers at the Fed will have to change course again, but it is solid enough to push back at those who want to see rates cut.

March 19-20, 2019 FOMC Meeting

In a Nutshell:  “… the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

Decision: Fed funds rate target range remains at 2.25% to 2.50%.

After the January FOMC meeting, I noted that the Fed has decided that it no longer has to do anything, but I also thought it hadn’t declared victory.  Well, they got pretty close to it today.  The Committee made it clear there is not likely to be any rate hikes this year and maybe just one next year.  And, the dreaded balance sheet runoff, which investors believed was sapping the liquidity that bolstered the markets, will start to slow in May and end in September. 

While investors may cheer the interest rate and balance sheet messages, they should not overlook the economic forecast.  The Fed downgraded its outlook for growth this year to just 2.1% and believes it will be no more than 2% in the following two years. 

Of course, that is what most economists would call trend, which means the labor markets will remain tight and wage gains will likely continue accelerating.  Can equity values grow decently under those circumstances?  That is questionable, since productivity appears stuck at a low level, demand is hardly rising, while labor costs are on the rise.  That isn’t a recipe for strong earnings growth.

So, where do we go from here?  Mr. Powell continues to argue that the Fed will watch the data and be patient when it comes to interest rates changes.  But the forecast also indicates the Fed doesn’t think it is at “neutral” yet.  The possible increase next year, in the face of mediocre growth and limited inflation, says the members do want to raise rates at least a little.  How he pivots to that possibility in the face of 2% growth is anyone’s guess.

The takeaway is that short-term interest rates are going nowhere.  Inflation is not likely to accelerate sharply since demand is not expected to surge. Therefore, longer-term rates don’t look to rise significantly.  But watch out for wages.  Their rise may not cause inflation to jump, but could cause earnings growth to falter. 

(The next FOMC meeting is April 30-May 1, 2019.)