Moderate Wage Growth
Chairman Powell
Wages have continued to grow moderately, with a modest acceleration in some measures, although the extent of the pickup likely has been damped in part by the weak pace of productivity growth in recent years.
My Interpretation
Hourly wages in January 2017 were up 2.9% Y/Y. It was the fastest pace of wage growth since 2009 and topped forecasts of 2.7%. Fearing the Fed would use wage growth as a reason to hike rates, financial markets sold off after the February jobs report was released. The Dow Jones fell by 8% in early February. Fears that the Fed could get behind the curve if it waited too long to raise rates drove chatter of three or four rate hikes in 2018. The fact that Powell described wage growth as “moderate” could imply the Fed is more focused on personal consumption expenditures (“PCE”) as the major catalyst to either hike rates or stay the course.
Gradual Rate Hikes
Chairman Powell
In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis … In the FOMC’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data.
My Interpretation
Chairman Powell wants to avoid an overheating economy. If record low interest rates for nearly a decade are working then they should able to stimulate the economy. The low unemployment rate and pick up in wage growth suggest the economy is picking up. President Trump’s tax cut could potentially be a tailwind if corporations share their boon in cash flows with workers. From that perspective gradual rate hikes would be warranted, lest the Fed risks falling behind the inflation curve.
However, Powell also wants to bring PCE to 2 percent on a sustained basis. PCE was 1.7% in 2017 and has not reached 2 percent since Ben Bernanke was Fed Chairman. The caveat appears to be that Powell is prepared to hike rates, but only if PCE reaches or exceeds 2 percent for a few quarters. I will believe it when I see it.
Conclusion
Fed Chairman Powell defined his goal of using Fed policy to achieve 2 percent inflation. Even if PCE does not reach 2 percent financial markets should be concerned that the Fed may no longer accommodate the markets at all cost. The punch bowl could get taken away by rate hikes or the gradual unwind of the Fed’s $4 trillion balance sheet. Neither bodes well for financial markets. Investors should avoid the markets until the impact of global central banks’ balance sheet reductions become more clear.
