FOMC Monetary Policy March 2019: Assessing future bias from statement and projection materials

As expected, the policymakers at FOMC kept the interest rate unchanged at yesterday’s meeting. Current Federal funds rate target 225-250 basis points.

Let’s first assess the bias in monetary policy statement –

• Improvement in the labor market remains strong, but economic slowed from a solid rate in the fourth quarter. (Dovish bias, as Fed acknowledges economic slowdown)
• Job gains remain solid, and the unemployment rate low. (Mild hawkish bias; positive statement despite economic slowdown but same as before)
• Household spending has slowed. (Dovish bias)
• Business fixed investment has also slowed from its rapid pace earlier in the year. (Mild dovish bias)
• Inflation both including and excluding energy and food, consumer prices is close to 2 percent. Indicators of longer-term inflation measures little changed, on balance. (Neutral bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The decision was unanimous. (Hawkish bias)

The statement was much dovish than the last statement which was pretty hawkish.

Now, let’s take a look at the changes made in the projection materials.

• FOMC downgraded its growth forecast for 2019 from 2.3 percent to 2.1 percent. Reduced its 2020 growth forecast from 2 percent to 1.9 percent. Maintained 2021 forecast at 1.8 percent. (Dovish bias because Fed downgraded GDP forecast by 0.2 percent for 2019 after reducing it by 0.2 percent in December)
   
• FOMC downgraded its unemployment rate forecast for 2019 from 3.5 percent to 3.7 percent, from 3.6 percent to 3.8 percent for 2020, and from 3.8 percent to 3.9 percent for 2020. (Mild dovish bias)
   
• FOMC downgraded inflation forecast for 2019 from 1.9 percent to 1.8 percent. Fed also reduced projection for 2020 and 2021 by 0.1 percent to 2 percent. (Dovish bias)
   
• FOMC maintained core PCE inflation at 2 percent for 2019, 2020, and 2021. (Neutral bias)
   
• FOMC downgraded rate forecast by 50 bps. Now projects no more hike in 2019 and only one in 2020. (Dovish bias as the next move could very well be a cut)

On balance, the Fed statement was pretty dovish, and without inflation shooting above target, the Fed is likely to sit tight.