Reasons Why the Fed’s Powell Will Be Proceeding Carefully

Jeff Roach (00:02):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, and in this edition of the Econ Market Minute, I want to share three key takeaways for investors from the latest Fed decision. First, the Fed implemented what I call the patient pause. We had good inflation readings for the last three months, and that has given the Fed the opportunity to be patient about future decisions. Will that progress on inflation continue? Well we think so, but Fed committee members are not yet convinced. A repeated phrase during the presser was "proceed carefully", which likely confirms the view that some, but not all, committee members are concerned about the unknown lags with which monetary policy affects the economy. Second, the dot plot is a poor predictor. So, the Fed's crystal ball is no better than the markets. And we know from history that the dot plot is not a good forecasting tool.

Jeff Roach (01:04):

Over the past several tightening campaigns, the median forecasts rarely, if ever, coordinated with actual policy rates. Dot plot medians tend to overestimate policy rates and sometimes by a wide margin. The most egregious example was in 2015, when the committee expected interest rates in 2017 to be above 3.5%. When in actuality they were closer to just a half percent that year. Third, the Fed will not yet declare victory. In this environment where inflation is still quite above the Fed's target of 2%, the Fed won't declare victory. The committee believes the last three inflation readings were good, but they were not yet convinced that inflation will continue to trend downward. I agree with some of the Fed that for investors, six-month inflation rates seem to be the right way to look at things in this stage of the business cycle. The labor market is getting into balance, but labor demand still seems to be stronger than the supply of available workers.

Jeff Roach (02:16):

So, in sum, I think it's quite reasonable to expect the Fed to purposely keep their options open about future interest rate decisions. For markets, the majority view is the Fed will keep rates unchanged throughout the rest of this year. So, I think the big challenges facing the Fed right now are the risks that inflation could become entrenched and the risks that the consumer could falter when excess savings dry up. Investors should still find opportunities in domestic equities, especially large caps, but it could be for a bumpy ride. Well, that's all for now. Follow me and the LPL research team on social media and take care.