The Fed moves to neutral with an upbeat forecast

In my piece before the Fed meeting, I expected the Fed/Powell to acknowledge economic improvement with short-term yields rising. I got half of that right. The Fed acknowledged economic improvement in the statement and press conference, but not to a degree that moved interest rates. More positive economic data will be required for that. I think what this meeting does for rates, is remove the impediment from short-term rates rising with the removal of the idea that the Fed still has a dovish bias. Rates will be data dependent from here. As I continue to see it, short-term rates are in a rising secondary trend with growth acceleration ahead.

Several Jerome Powell quotes across several topics:

1. An upbeat forecast. “Well, first of all, if you look at the incoming data since the last meeting, clear improvement in the outlook for growth in the data has come in, and sentiment, the Beige Book, everything, comes in suggesting this year starts off on a solid footing for growth. Inflation performed about as expected, and as I mentioned, some of the labor market data came in, suggesting evidence of stabilization. It is overall a stronger forecast, really.”

2. On surprising economic strength without fiscal stimulus: “But you’ve got strong consumption that’s been happening before financial conditions have been supportive, but before the fiscal effects really are shown. So essentially the economy has once again surprised us with its strength, not for the first time. You know consumer spending, although it’s uneven across income categories, but consumer spending overall numbers are good.”

3. On broad committee support for holding rates: “So, there was broad support on the committee for holding today, broad I would say including among non-voters. That is where that was. Of course, some people did want to cut and dissented but the committee pretty broadly was for holding today.”

4. On future rate cuts. “We haven’t made decisions about future meetings but the economy is growing at a solid pace, the unemployment rate has been broadly stable and inflation remains somewhat elevated.”

5. On the neutral rate. “I think and many of my colleagues think it is hard to look at the incoming data and say that policy is significantly restrictive at this time. It may be sort of loosely neutral or it may be somewhat restrictive. You know, it is in the eye of the beholder, and of course, no one knows with any precision.”

6. On Fed independence. “I will simply refer to you to the statement I made on January 11th. I’m not going to expand on it or repeat it. This is really about the press conference and the economy and what we did today, and some ancillary areas, but I’m not going to be getting into that.”

7. On strong GDP versus weak labor: “So, there has been, you’re right, there has been a divide of solid growth, but what looked like a weakening labor market. That can be explained by rising productivity. But I would say we do see signs of certainly of the unemployment rate stabilizing. So it may be we’re seeing the beginning of the resolution of those two things.”

8. On Fed professionalism: “It’s easy to criticize government institutions in so many ways. I will tell whoever it is [the next Fed chair], you’re about to meet the most qualified group of people you not only have ever worked with, you will ever work with. And when you meet Fed staff, and not everybody’s perfect, but there isn’t a better cadre of professionals more dedicated to the public well-being than work at the Fed.”

9. On recent gold and silver gains: “[We] don’t take much message [in it] macro-economically. The argument can be made, its you know, that we’re losing credibility or something is simply not the case. If you look at where inflation expectations are, our credibility is right where it needs to be. So, we look at those things, we don’t get spun up over particular asset price changes although we monitor them of course.”