The March FOMC meeting was the first under the new Fed Chairman Powell and the first meeting including projections by the new members of the Fed. What are your views on the outcome of this meeting?
Ken Taubes: Chairman Powell held a successful major press conference in his first Federal Open Market Committee (FOMC) meeting, fulfilling expectations of a more hawkish FOMC, yet quelling concerns of too hawkish a tilt. While aspects of the FOMC’s statement and projections support the market view of its more-dovish-than-expected bias, we believe that GDP growth and inflation trends could justify four rate increases over the year, and that the Fed continues to risk being behind the curve in raising rates. The FOMC met market expectations, revising GDP growth estimates higher over the next two years, reducing unemployment estimates, and increasing the projected federal funds rate significantly in 2019 and 2020. The projected 2020 rate of 3.4% is well above the slightly increased terminal rate of 2.9%. The more dovish aspects of the meeting and projections involved the 2018 rate forecast, and their NAIRUand inflation estimates. The median estimate for the number of rate increases in 2018 remained at three, (although only one “dot” kept that median from rising to four rate increases). Second, the FOMC reduced its estimate of NAIRU (longer-run unemployment rate) from 4.6% to 4.5%, while also projecting an unemployment rate significantly below that level in the next three years, at 3.6%. Yet these lower unemployment projections did not give rise to any marked increase in the inflation forecast. In other words, the FOMC appears to believe that wage inflation may be slower in materializing, even with employment levels well below NAIRU levels. In addition, the change in 2020 inflation estimates from 2.0% PCE inflation to 2.1% suggests that the FOMC is more comfortable with inflation overshooting the longer run 2.0% level, implying inflation remains relatively contained.