Fed Emphasizes Patient Stance
The FOMC meeting is now behind us, and while there was not much change to existing monetary policy there is still plenty we learned from the statement, the Summary of Economic Projections, the dot plot of fed funds rates, and the Q&A at the Powell press conference. In fact, we think it was one of the key Fed meetings of the past year. We discuss the meeting in more detail below and encourage you to review our thoughts. Meanwhile, the beat goes on and Treasury yields are continuing to push ever higher given the positive economic and health backdrop and the Fed’s implicit blessing that higher rates are not an immediate concern.
With the latest FOMC meeting behind us, and with the advantage of time to assimilate all that we have been given, we thought it useful to highlight our thoughts on what the Fed told us in the statement, the Summary of Economic Projections, the dot plot and the Powell press conference.
- Fed Chair Jay Powell stressed, once again, the Fed will be driven by actual economic results not projected results in the conduct of monetary policy. This is a big change from past Fed guidance. Remember in the past the Fed did not want to appear to be “behind the curve” so they acted early. Well, in Powell’s current thinking that choked off more recoveries than it saved in dampening inflation. Expect this time for the Fed to err on the side of running the economy a little hot before pulling the punch bowl away. Believe them.
- That being said, the FOMC doesn’t believe excessive inflation will be a problem. In their economic projections the highest any FOMC member thinks core PCE inflation will reach is 2.5%, and that is this year, then recede back towards 2.0%. Thus, one has to conclude that Fed action on monetary policy will be driven more by the full employment mandate while the inflation, or price stability, mandate takes a backseat. They just don’t see excessive inflation as a real long-term problem. That is a paradigm shift for the Fed but one that we agree with and welcome.
- Don’t focus on the unemployment rate to dictate reaching full employment. Powell made it clear in the press conference that while the Summary of Economic Projections only lists the participants views on the unemployment rate, they will be taking many other metrics of labor market health into consideration. We have mentioned the U6 rate, or the underemployment rate, along with the Labor Force Participation Rate as some of the broader measures of labor market health. Powell stressed in the press conference that 10 million workers remain unemployed since the pandemic and another 5 million have dropped out of the labor force, no longer employed and no longer looking. Those people are not in the U3 unemployment rate but still very much alive, if not well. So, don’t guide your view on full employment by the traditional unemployment rate alone, that will mislead you.
The bottom line on the Fed meeting? While the Fed may indeed move a rate hike into 2023, they will be guided on that by actual economic performance and not by expectations. More importantly, they will be guided by a return to full employment rather than a concern over inflation ticking over 2% for a time. What that means is zero lower bound for another two years, or so, and less concern over inflation, or higher long-term rates, as long as financial conditions don’t tighten excessively.
Treasury Investors Buying Fed’s Patient Story
It’s no secret the Fed has been consistent in its messaging that with their new monetary policy framework, that was unveiled at Jackson Hole last August, they will wait to see realized improvement towards their goals before reducing monetary policy accommodation. It looks like Treasury investors have received the message when you look at the steepness added into the Treasury curve since the start of the year. The moves have all occurred at the long end while the short end remains anchored by stable fed funds expectations of little to no hikes through 2023. While the Fed has convinced us that they will let the economy run a little hotter than past expansions, now we wait for actual economic results, as Powell has said. The question is when will they become concerned about the lift in longer-term yields? To date, they profess no such concern. A higher yield by itself doesn’t concern the Fed but if the selling becomes disorderly, and financial conditions tighten, and equities take notice and start to correct materially lower that’s when you can expect some targeted QE buying and forceful statements to quell the yield moves. With equities at or near all-time highs, and financial conditions still relatively loose, we’re still a long way from Fed concern it appears.
Homeownership Rate Falls in Pandemic
The housing market has been on fire once the earliest lockdowns passed and homeowners looked to move from crowded urban settings to more distanced suburban locations. That trend continues, more or less, today as existing home sales in the graph (blue line) close in on the housing bubble highs of 15 years ago. On the other hand, homeownership rates (white line) have fallen from the peak of a year ago as the pandemic forced some homeowners to sell, or relinquish homes. What that most likely means is there are still plenty of potential homeowners looking to get back into the market once job situations stabilize and inventory becomes available. Thus, the run in the residential market looks to have more legs.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.00%||-0.03%||1 Mo LIBOR||0.11%||Unch||FF Target Rate||0.00%-0.25%||3 Year||0.429%|
|6 Month||0.03%||-0.01%||3 Mo LIBOR||0.19%||+0.01%||Prime Rate||3.25%||5 Year||0.923%|
|2 Year||0.15%||Unch||6 Mo LIBOR||0.20%||+0.01%||IOER||0.10%||10 Year||1.674%|
|10 Year||1.74%||+0.15%||12 Mo LIBOR||0.28%||-0.02%||SOFR||0.01%|
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