No rate increase from Feds, pleasing Trump

To the delight of many, including President Trump, the report from the Federal Reserve’s Federal Open Markets Committee meeting that ended Wednesday, said in its summary report that there were no plans to raise interest rates, a move that had been previously derided by Trump, as well as his denouement of Fed Chair Jerome Powell.

The news stoked an uptick, during Powell’s remarks, of the Dow, which shot up 200 points but, later dropped to 142, but, nevertheless, the White House is building on the news for the reelection campaign of the president.

As anyone who has taken a basic course in macroeconomics knows, the mandate of the Federal Reserve is to keep inflation beneath 2 percent, and to lower unemployment, a mandate that it has adhered to over decades.

Trump’s trashing of Powell as a threat to a healthy economy gave the injection of politics into the role of America’s central bank, and some have said there was a stare down between the two men - yet, the U.S. economy is on solid, if not spectacular ground, much like during the Obama years, and increasing employment, on a steady basis, just as Powell, (like former chair Janet Yellen), kept an even hand on the tiller, using data, not politics, to keep it there; and, ensuring, perhaps to the horror of the president, steady employment under his watch.

Rates are now between 2.25 percent and 2.5 percent, and are expected to stay that way, and with unemployment remaining low, despite the February Jobs Report that many economists and bankers see as typical for the month, those that predicted that there might be one in 2019 and maybe one more in 2020, are now looking pessimistic - and there is joy on Wall Street, as well as Main Street.

Yahoo Finance reported that “In keeping interest rates steady at the current target range of 2.25% to 2.5%, the Fed said that the labor market "remains strong" but said economic growth has "slowed from its solid rate in the fourth quarter."

“The Fed statement said indicators have pointed to "slower growth" of household spending and business fixed investment,” hinting at a slowdown in consumer spending and a corresponding slowdown in the GDP.

There is still a difference of opinion in predictions for the economy with the White House proclaiming 3.2 percent growth, and others seeing far less.

The New York Times reported that “The Fed now expects 2.1 percent growth this year, down from the 2.3 percent it forecast in December — and more than a percentage point less than the 3.2 percent growth the White House predicts. The outlook for 2020 is even more bleak, with the Fed now projecting growth of just 1.9 percent.”

If the devil is in the details, there is much to be seen, and “by signaling it will not raise rates without a clear change in conditions, the Fed is effectively giving Mr. Trump what he wants from monetary policy, but with a twist. The president has publicly pushed Mr. Powell to stop raising rates. But if the Fed is correct and growth falls well below 3 percent this year, without a single rate increase, it will be difficult for Mr. Trump to pin the blame on Mr. Powell,” they added.

Concern is still on the horizon for trade wars that Trump does not want to ease, and also the continued rejection by the British Parliament on Brexit, and the weakened, but slowly strengthening, Chinese economy; global concerns that darken an otherwise rosy outlook.

Looking at the FOMC report, it was clear that there would be no rate hikes “for 2019 — [and] came from an overwhelming majority of participants: 11 out of 17.”

The members opine were carefully laid on the now infamous dot plots, and they show that “for 2020, the median dot sits only 25 basis points above that level, telegraphing that only one rate hike could be in the cards through the end of next year,” said Yahoo Finance.

What is a dot plot, some ask - and Barron’s gave a brief description that can help that mythical person, the general reader: “For most of its history, the Fed did not tell the public where interest rates would go. Traders could make their own projections based on their readings of the economic data and their guesses about officials’ preferences, but the opinions of the people who actually set short-term interest rates were effectively a secret.

That changed seven years ago, thanks in large part to the efforts of Janet Yellen, then the Fed’s vice chair. As she explained at the time, the goal was twofold: Increased “transparency” would bolster the central bank from political attack, while the introduction of “forward guidance” would give monetary policy makers another tool to boost the economy.

Beginning in January 2012, the central bank has included regular summaries of what officials believe is the “appropriate” level and path of the Fed’s policy interest rate over the next several years. For the sake of equal representation of the Federal Open Market Committee’s members (as many as seven governors on the board in D.C., plus the 12 regional bank presidents), these summaries look like stacks of dots rather than lines or fan charts, hence the term “dot plot.”

This is not to say that there is infallibility, and Market Watch noted that “The dot plot was useful when the path of interest rates was always assumed to be higher. It doesn’t work as well when the direction of the next move is uncertain,” noted Kevin Logan, chief U.S. economist at HSBC.

Powell said last week he’s asked the FOMC’s communications subcommittee to look at the issue and its future issue.

Notably these “projections are a significant downward revision from the December FOMC meeting where policymakers raised by 25 basis points and said the economy could absorb "some further gradual increases." For comparison, the median dots in the December dot plot signaled two rate hikes for 2019 and a third in 2020.”

The partial government shutdown had its effect on the February Jobs Report, as well as the aforementioned political pressures, all that contributed to the fall for that month, despite those bankers, and observers, that saw it as a “pause” after the Christmas holidays and retail season.

Another source of concern was the unwinding of the balance sheet of Treasury securities, and mortgage-backed securities indefinitely, by up to $50 billion per month, that were part of the Central bank’s plan of  “quantitative easing” during the Recession to keep interest rates low and inject money into the economy, are now beginning an unwinding - a long held desire by Republican lawmakers.

“In May, the Fed plans on slowing the reduction of its holdings of Treasury securities. Currently the Fed is allowing redemptions on $30 billion of Treasuries a month, which it will slow to $15 billion.

The Fed says by the end of September, they will conclude the reduction of its securities holdings. A statement added that at that point in time, the Fed will have balance sheets that will "likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy."

“With more clarity on the size of the balance sheet, the next step for the Fed will be deciding its ultimate composition. Some Fed officials have advocated for a more "neutral" balance sheet skewed toward shorter-term Treasurys in place of the Fed's current longer-term Treasury and agency debt and mortgage-backed securities holdings.”

Another change is to move from the traditional target rate of inflation from 2 percent to 3, a seismic move from the traditional pattern, but which is under serious consideration by its main proponent Richard Clarida, vice-chairman of the Reserve, who “is spearheading an internal strategy review to determine whether the Fed should start making up for below-target inflation during recessions and slow recoveries by allowing for above-target inflation during expansionary periods.”

Clarida laid out his plans late last month at the University Of Chicago Booth School Of Business at its monetary policy conference.

And though the review is still in its early stages, the Fed already seems to have embraced the idea that inflation might be allowed to exceed 2% without immediately triggering a tightening, something unheard of in previous decades.

Despite this dovish tone, the president and his staff are taking a full court press to make the strong economy the capstone of his reelection campaign.

“Trump’s presidency has been dotted with controversies, and he is a polarizing figure. As such, his political fortunes may be even more tied to the economic winds,” and “I think his reelection bid will live or die based on the economy,” said Mark Zandi, chief economist of Moody's Analytics, to The Hill.

In turn Trump said to generous crowds in Ohio, “It's going to be really easy on the debate stage when they hit me with nonsense and I say, 'Really? But African American unemployment — the best it's ever been,’” he said in Lima. “Hispanic, Asian, women, everybody — it’s all the best it’s ever been.”

“How do you top that in a debate?” he said. “What are they going to say?”

With a stay on interest rates, and a solid, if not great economy, and debates on future economic growth, it may be a case that the 14 Democratic hopefuls are going to have to look beyond Trump’s tub thumping and see the realities of American lives, and that will truly be a debate.