Wednesday marked the conclusion of the Federal Open Market Committee (FOMC) meeting. As expected, the Fed did not raise short term rates and maintained its assessment of the US economy as growing at a healthy but not robust clip. This meeting was not accompanied by a presser with Fed chairman, Jerome “Jay” Powell, presiding but was significant- at least in our view. Why? The Fed stayed the course and included the word, “symmetric,” within its statement.
What’s in a word? Market participants pay close attention to central banks and their statements, so any change in wording tends to get plenty of scrutiny. Sometimes parsing Fed speak is a bit overdone, but other times it can be quite eye opening. In this case, it seems to give us some insight into the machinations of the Powell Fed- something markets have been grappling with year to date. Before we jump in, please keep in mind that the Fed has a dual mandate from Congress: maximum employment and price stability.
Inflation is a key component of price stability, and the Fed has established 2% as its year over year inflation target. The idea is to keep the economy from overheating or overcooling- promoting a stable, more predictable economic backdrop in which consumers consume and businesses invest. In a sense, the Fed is designed to influence the economic environment via monetary policy. To understand the Fed, it is also useful to understand its makeup.
The Fed is essentially composed of governors, a voting body (i.e. the FOMC), and a chairman- meaning it has an organizational structure similar to what most of us are familiar with. It is also worthwhile to note that the FOMC is essentially a small organization comprised of 13 voting members, including its chairman; the smaller the organization, the more relevant the leadership. So, we are quick to observe when leadership changes and with any changing of the guard, each central bank must answer a simple question: is our goal to manage the economy or does the economy manage us? The answer is… Both! However, each central bank has a bias and biases generally result in skewed policy, which leads us back to the term: symmetric.
Symmetric, in financial terms, means balanced. Now, let’s do some parsing…the Fed attached the adjective “symmetric” to modify the noun “inflation” in its statement. The concept of symmetric inflation might lead us to believe that the Fed is rejecting the idea of 2% inflation as a threshold for action and embracing a band around 2% with which policymakers are comfortable. The trouble is… there isn’t much news in that. Further, policymakers seemed content to look through a dip in household spending and cling to the prospects of increasing fixed business spending or capex to fuel growth expectations. Failing to address near-term concerns/ risks while simultaneously anchoring to the prospect of a bright but distant future are rarely the hallmarks of good leadership/ management. Most of time bright futures are attained through vigilant attention to detail and smart, rational decision making. This leads us to our argument: perhaps the Fed statement implies an error in judgement.
It isn’t that Jay & Co. can’t change course or provide “clarity,” but the last time the FOMC met was March of this year. Between now and then, there has been plenty of data to sift through and plenty of material geopolitical developments. As noted in our Quarter in Review, “the reasons for caution are relatively small in number but large in magnitude,” implying an asymmetric outlook for risk assets absent a change in policy. Our strategic outlook assumes an accommodative stance from policymakers as an offset to the low but rising probability of “negative surprises.” However, if policy remains untethered to rising risks, then it is difficult to imagine many Americans will be wanting to check their 401k balances.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
https://www.federalreserve.gov/monetarypolicy/files/monetary20180502a1.pdf