If a favorite policy metaphor for our times is the slow-moving ship, then the March Fed meeting may be the last turn of the wheel for a fairly sharp jibe. Volatile financial markets have left the Powell Fed scrambling to change course over the last three months. The March FOMC is expected to deliver several important, perhaps final, changes to reverse course from the semi-disastrous December meeting. Given the exceedingly dovish comments from Fed officials in recent weeks, another round of market-reassuring messages seems in store, setting a course for renewed debate in the second half of 2019.
What to Expect:
- Not a rate hike: The Fed is straining to catch up with market expectations for more dovish policy and to contain expectations for a rate cut. Even if you wanted to see higher rates later this year, now is not the time. The uncertainties around trade, Brexit, financial markets, and global growth are front-loaded. A hike is out of the question.
- Dot plot trimmed: Expectations are firm for policy makers to pare their forecasts for rate hikes to one or none in 2019. Leaving forecasts for two or more hikes intact now seems unthinkable for all but the most hawkish Committee members. Only three FOMC dots need to drop for the March dot plot to show one hike. Retaining a forecast for one hike would be reasonable, because consolidated market views or not, a lot can happen in 9 months. We’ll see if the majority of the Committee agrees. Expectations for hikes in 2020 and 2021 will probably come down as well.
- Balance sheet reduction on borrowed time: Based on the minutes of the January meeting, it seems likely that the Fed will announce plans to halt its program of reducing its asset holdings sometime between this September and this December. Originally this process was expected to run several more years, but while Fed staff seem to remain incredulous that the Fed’s balance sheet can be plausibly blamed for market volatility, Fed policy makers seem unwilling to confront financial markets amid the various risks to the growth outlook. Softness in recent economic data has surely left them feeling vindicated about their change of heart. Note that, according to the January press conference, the Fed may announce its plans for the future composition of its balance sheet, in addition to or instead of its size. The Fed has long seemed set on a portfolio of only Treasury securities, and likely weighted toward relatively short-term ones. It's that precise weighting that is most in question, as the Fed looks to maximize its ammunition ahead of the next recession. Expectations also seem to be running high for the Fed to announce a process for slowing or tapering the reduction in the size of the balance sheet.
- FOMC statement: The changes here should be pretty downbeat, to bring the text in line with the decidedly mixed data of the last few months, and that will reinforce the dovish message of the meeting. Some of the revisions may be downplayed with qualifiers, because much of the data has been incomplete (due to the partial government shutdown) or just plain noisy.
- Economic forecasts: Probably not a lot of changes, but keep an eye on 2019 GDP growth, inflation, and the estimate of long-term unemployment. Any of these could get revised downward given weak economic data, softening inflation expectations, and signs that – once again – there is more slack in the labor market than previously appreciated.
- Press conference: The big question for investors is, "What would lead the Fed to restart rate hikes?" While the global growth outlook and passage of key risk events will be important here, another consideration is a question for the wonks: Will the Fed adopt a strategy of overshooting on inflation in order to make up for previous undershoots? Journalists will also likely continue to quiz Chair Powell on fiscal policy and recent debates about Modern Monetary Theory, but he will probably avoid these as much as possible and stick to sounding a note of caution about the U.S. public debt burden.