Fed Statement: “No burger between the buns”

The “burger” was taken out at the March 17 FOMC meeting. Since then, it appears the “transmission mechanism” has broken. As Tim Duy, a well-known Fed watcher puts it:

That said, the Fed will balance the inflation data against the broader economic backdrop of ongoing job growth and easier financial conditions. If the latter two trends continue, policy makers will be hard-pressed to rein in existing rate hike plans even if inflation continues to fall short of their forecasts.

The traditionalists at the Fed, including Yellen, retain their fundamental Phillips curve framework. They think it is only a matter of time before the Phillips curve is proved true and sends inflation higher, especially if monthly job growth remains well above the 100,000 level. They do not want to find themselves well below their estimate of the neutral interest rate should inflation accelerate.

And:

Moreover, they have reason to retain faith in their fundamental forecast that inflation will return to target given that financial conditions have eased, not tightened, in response to the Fed’s five rate hikes in this cycle.

What the March FOMC meeting signaled is that the Fed is set in slowing the economy down from its already “crawling” speed. Financial conditions have not become “easier”, they just reflect lowered expectations for economic activity going forward.

That is clear from:

The dollar

Inflation expectations

Long-term yields (in somewhat “Humpty-Dumpty” fashion)

And bond spreads

Although the Statement mentions that “household spending continues to expand”, it is doing so at a declining rate since the March meeting.

And now a new “relative soon” meme came out, this time with reference to balance sheet “normalization”. No wonder markets have a negative feel about the future.

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