Today we are pleased to present a guest contribution written by Jeffrey Frankel, Harpel Professor of Capital Formation and Growth at Harvard University, and former Member of the Council of Economic Advisers, 1997-99.
Financial markets reacted to the outcome of the FOMC meeting on Wednesday, March 16, as if what the Fed had revealed was highly dovish, that is, diminishing expectations regarding future interest rates. Dollar down, stocks and bonds markets up…
The markets were looking at the shift in the “dots plot” which formally rescinded the Fed’s previous forecast that it would raise interest rates four times in 2016. (Now it says twice.) Furthermore, Chair Yellen in her press conference said, “Most Committee participants now expect that achieving economic outcomes similar to those anticipated in December will likely require a somewhat lower path for policy interest rates than foreseen at that time.”
But this is old news. It reflects developments at the start of the year, such as the US report that GDP growth had been weak in the 4th quarter and the global financial market volatility in January and early February (especially related to China). Everyone knew all this a month ago.
The new news pertains to what has happened since mid-February. A lot of trends that had appeared to be negative have reversed in the last month. Statistics on US domestic final sales in January suggest that GDP will likely be stronger in the first quarter. Meanwhile, job gains were back up to 242,000 in February, reaching a record six-year-long streak of private employment growth. And globally, downward pressure on the renminbi, the US stock market, and commodity prices — which had so worried investors – all abated in February-March.
So did the Fed recognize these signs of economic strength in its statement Wednesday? Yes, it did. Gone was the January sentence “…economic growth slowed late last year.” In its place was a note that “economic activity has been expanding at a moderate pace…” (Also “Inflation picked up in recent months.”) Unless I am mistaken that language wasn’t there before, only the longstanding positive language about employment. It seems to me that the markets this week may have missed an acknowledgement from the Fed that things have turned around since the first six weeks of the year.
This post written by Jeffrey Frankel.