SCARY FED

David Rosenberg convincingly argues that the Fed has embarked us all in a completely new regime and that the Powell-led FOMC will prove very different to the Bernanke-Yellen led Fed. Importantly, gone is the Fed put as the minutes of the first Powell FOMC meeting reveal:

In fact the Fed, at the margin, took up its growth forecast and is far more confident over inflation heading back to 2% and staying there. The Fed staff also sees the prospect of the tight labor market getting even tighter.

The March meeting minutes tell us that participants (i.e. FOMC members) consider that everything is well balanced in this economy:

• As in December, most participants judged the risks around their projections for real GDP growth, the unemployment rate, and inflation to be broadly balanced.
• participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric.

Same with the FOMC staff:

• The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced.
• Risks to the inflation projection also were seen as balanced.

In effect, the Fed is comfortably positive on the economy, the labor market and inflation but has no clue as to how things might evolve if their balanced economy proves to be not so balanced. Yet, they all agree that the economy will remain strong enough to warrant 2 or 3 additional rate hikes in 2018 and another 3 in 2019 right when we are only 2 hikes away from an inverted yield curve. This while the U.S. and world economies are more indebted than ever.

Participants

expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals. Among the fundamentals that participants cited were high levels of consumer and business sentiment, supportive financial conditions, improved economic conditions abroad, and recent changes in fiscal policy.

Amazingly, all eight FOMC participants at the meeting agreed on the outlook. All of them! They all agreed that the apparent Q1 weakness was “transitory”, even though the tax refund delays were very minor and that there was actually no “residual seasonality in the data” as the FOMC staff clearly stated:

(…) the incoming spending data were a bit softer than the staff had expected, and the staff judged that the softness was not associated with residual seasonality in the data.

None of the participants expressed any discomfort with the fact that consumer credit exploded $72 billion in Q4 2017, seasonally adjusted, and another $26B in January and February, and that consumer credit has grown at twice the rate of growth in disposable income since 2016, dropping the savings rate from a comfortable 5.9% in January 2016 to a truly uncomfortable historical low of 2.4% in December 2017. There was zero discussion on the possibility that Americans might decide to bring their debt/savings level to a more comfortable range. Zero thoughts that recent and upcoming interest rate increases could impact credit and spending.

And yet, weak spending in Q1 had nothing to do with delayed payment of some personal tax refunds and residual seasonality in the data. It was all because the savings rate rose to 3.4% in February, a huge 1.0% jump in 2 months to a still low level. Looking at the chart below, how much would you bet that the savings rate will remain at its current low level over the next 18 months? Would you say that the risks are balanced and that your confidence interval around your projection are approximately symmetric?

We are discussing 70% of the U.S. economy here and all eight FOMC voters saw no reason to even discuss the risk that consumer spending might be weak because of historically low savings and excessively high debt. All eight penciled higher interest rates through 2019.

So much for the first Powell Fed meeting!

Yes, this is a new regime, brought by a lawyer chairman with very little experience and one of the most inexperienced FOMC committee ever. Scary!