What Happened Yesterday: Either Something Spooked The Fed Or There Is A "Central Bank Accord"

Yesterday’s FOMC meeting and press conference generated widespread unease. My personal uncomfortable feeling was reminiscent of a time many decades ago when a date stood me up and provided an excuse that made little sense. Simply put, the combination of the FOMC’s forecasts, economic assessment, and guidance on the future path of interest rates were incongruous and disconnected to their ‘data dependency’ message. 

This week was a curious time to recalibrate to a far more dovish stance since it has followed clear improvement in labor markets, inflation indicators, and inflationary expectations.  Even with the modest downward adjustments to their economic projects, the Fed’s goals and mandates have not only (basically) been achieved but they seemingly have economic momentum behind them as well.

Core year-over-year inflation measures have been rising. Core CPI rose to 2.3% earlier this week. The PCE deflator has risen to 1.7% which already stands above the Fed’s year-end estimate.  The Fed once again lowered the level it believes to be its longer-run estimate of the natural rate to 4.8%.

Regardless, with the unemployment rate currently at 4.9%, the Fed is implying by its belief in the Philips Curve that wages will soon accelerate. Despite modest changes in the Fed’s economic projections, the Fed is forecasting growth above its estimate of potential growth. So how is it possible that a ‘data dependent’ Fed turned dovish?

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