Economic Flash

Fed Signals Markets Should Focus on the Data, Not the Dots

by Craig Dismuke, Dudley Carter

Fed Signals Markets Should Focus on the Data, Not the Dots

The messaging in the Fed’s November Minutes seemed to reinforce the tone of recent marks from numerous Fed officials: After a likely December hike, markets should focus on the data, not the dots.


As expected, the Minutes described economic activity as “strong” despite some moderation in business investment and “weakness” in housing. There were more potential headwinds than tailwinds listed, although they concluded “risks to the outlook appear roughly balanced.” And they “observed that financial conditions tightened” but “a number” noted they remained accommodative “relative to historical norms.” Importantly, there was agreement that “labor market conditions had strengthened further” and “recent price developments [were] consistent with their expectation that inflation would remain near the Committee’s symmetric 2 percent objective on a sustained basis.” As a result, “almost all” officials expected “further gradual increases in the target range” would be appropriate, with the next “likely to be warranted fairly soon.”


While that agreement could be seen as shoring up expectations for a fourth rate increase for 2018 on December 19, the Minutes showed the debate about 2019 and beyond is heating up. Several of those who expected additional rate hikes “expressed uncertainty about the timing of such increases.” A “couple” said the current range may already be near neutral and additional  hikes “could unduly slow the expansion” and “put downward pressure on inflation.” The full group “emphasized” that policy decisions “should be importantly guided by incoming data and their implications for the outlook.”


Further attempting to shift the market’s focus from the dots to the data, the Minutes noted the dot plot was “based on their current assessment” (emphasis added) and reiterated “policy was not on a preset course.” The Official Statement may soon reflect this sentiment too. It might soon be appropriate to “begin to transition to statement language that placed greater emphasis on…incoming data in assessing the economic and policy outlook” in order to stress the Fed’s “flexible approach in responding to changing economic circumstances.” The Statement language expecting “further gradual increases” might also need revising.


In addition to the debate about the path for the Fed Funds rate, there was a more extensive conversation about how policy should be carried out longer-term, further technical discussion of the IOER rate, and an assessment of the balance sheet unwind progress. The convergence of the effective Fed Funds Rate and the IOER rate meant another adjustment to where the IOER rate is set may be needed “fairly soon”, even possibly before the December meeting. But technical factors continued to be cited as the reason for the gap closing, not a shortage of system reserves resulting from the Fed’s unwind.


Bottom Line: Considering the uncertainties related to the economic outlook and longer-run estimates of key policy variables, policymakers’ stressed that they will increasingly rely on the “evolution of the outlook as informed by incoming data,” to determine whether to push forward with their planned path or pause somewhere along the way.

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