The FOMC held steady today, as expected. They reaffirmed their basic forecast, but gave a nod to current global economic and financial economic uncertainty. That is all that should have been expected.
Still, there is a deeper story.
Puzzle over the opening paragraph for a moment (thanks to the WSJ FOMC Statement Tracker):
I feel like I will soon be going down the hall and grabbing an English professor to help me translate these statements. I hate to do this sort of thing, but notice that they brought the labor market forward and pushed the overall economy back? I think there are two things going on here. First is that the FOMC, on average, has a Phillips Curve view of the world. They aren't going to let go of the labor market until it turns. And turns hard given that the unemployment rate is hovering near their estimate of NAIRU. Hence they will tend to emphasize the labor data.
But something else is going on. Next week, we get the fourth quarter GDP number. No one is expecting miracles. I would be totally unfazed by a negative print. Considering the normal variance in quarterly GDP numbers in the context of a two percent potential rate of growth, you are going to see more negative prints during expansions. Get over it.
The Fed isn't expecting miracles either. But what they are confused by is that in the first quarter of 2015, GDP growth slowed sharply:
And with it, job growth accelerated:
Now they have slow GDP growth and fast employment growth. That will make brains explode on Constitution Ave. They don't know what to do with that when unemployment is at 5%. You see where it cuts either way. If the recessionistas are correct, then they already made a mistake in December. If the optimitistas are correct, they will fall behind the curve if they hold in March.
And that is without the uncertainty of the financial markets. Did the Fed release a little steam by shifting into a tightening cycle, the avalanche control of Mark Dow? Or did they set in motion the next financial crisis?
And recognize that this is within the context of a no-win political situation. If they miss on the upside with higher inflation, they will be pilloried by the right (and ultimately, I suspect the left). If they miss on the downside with recession, they will be pilloried by the left and right. Rock, meet hard place.
So, considering all this, you can't really blame the Fed for taking a pass on quantifying the balance of risks. From their perspective, there is no way to answer the question. And that's how the absence of a balance of risks should be interpreted. Neither as an intention to downgrade further in March, nor to upgrade. It is what it is. Pure, absolute uncertainty. White noise.
Yeah, I don't find that comforting either. Get over it.
So do we know anything more about March? A little. We know from the December SEP that, on average, the FOMC expected to raise rates in March. What we know now is that they are less certain of that outcome. My guess: If job numbers remain sufficient to put downward pressure on unemployment, first quarter GDP trackers look solid, and financial markets calm, they will hike rates. If only one of those conditions is met, then they will pass. If two, then it is a tossup. Tossups usually go to the doves.
Bottom Line: The Fed got lucky this month. They weren't expected to do anything, which takes the pressure off. But in March, they might have a real decision to make. We have only six weeks of data to digest. Even assuming that labor markets hold solid, will that be enough? Doubtful. They will need more.