All eyes on the Fed: Powell’s first meeting won’t be boring

While markets are nearly certain that the Fed will increase interest rates by 25 basis points and maintain the current “passive and predictable” normalization of its balance sheet at the upcoming Federal Open Market Committee (FOMC) meeting, there are many reasons to expect anything but a boring meeting.

There will be five key issues to monitor carefully Wednesday afternoon after the two-day meeting is completed.

Will new leadership rock the boat, or will it be smooth sailing?

As Jerome Powell chairs his first two-day FOMC meeting, many will be watching for signs of a new leadership style. Will Powell follow in the consensus-building style of his predecessor Janet Yellen, or will he want to impose his personal views more strongly?

{mosads}As he testified to the House Financial Services Committee in late February, we got a first taste of what Powell’s leadership at the Fed may mean. Powell appeared more outspoken than both his predecessors, Bernanke and Yellen, and he didn’t refrain from pushing forward his personal views indicating, “My personal outlook for the economy has strengthened since December […].”

While Powell did adopt a more subdued tone when testifying to the Senate Committee on Banking, Housing, and Urban Affairs the next day, he nonetheless remained quite candid and bullish on the economy.

The devil is in the statement’s details: New watchwords.

The FOMC policy statement is likely to contain many of the key phrases from prior statements, but also some new ones. In particular, the Fed may decide to upgrade its assessment of risks to the economic outlook from “balanced” to “positive.”

Given the FOMC expects economic activity to continue to expand at a moderate pace with labor market conditions remaining strong and inflation firming, it seems very likely that the FOMC will note “further gradual” rate increases in the coming months.

In addition, two new watchwords may appear in the FOMC statement: “overheating” and “symmetrical.” The Fed will likely state that while reduced slack in the economy and labor markets will continue to push inflation higher, it sees no imminent risk of overheating in the economy.

The statement may also indicate that the Fed’s 2-percent inflation target is symmetrical, and thus temporary overshoots can occur.

Economic projections upgraded: From headwinds to tailwinds.

Along with the policy statement, the Fed will also be releasing the latest Summary of Economic Projections (SEP) containing FOMC participants’ forecasts for GDP growth, the unemployment rate, headline and core PCE inflation.

These newly minted forecasts are likely to reveal a rosier outlook for the U.S. economy reflective of ongoing strength in global activity and increased fiscal stimulus domestically.

Expectations for real GDP growth in 2018 will likely approach 3 percent (from 2.5 percent in the December SEP), while the outlook for the unemployment rate will be revised further below 4 percent.

In light of the reduced economic and labor market slack, higher energy prices and a weaker dollar, the inflation outlook is also likely to be revised up, approaching 2 percent in 2018.

More importantly, the Fed’s long-term outlook may also be revised, giving us an indication of its estimate of supply-side benefits from the fiscal stimulus programs. Considering still modest wage growth readings, we would expect the Fed to lower its estimate of the long-term (non-inflationary) rate of unemployment.

Any modifications to potential output growth are likely to be muted as the Fed has often tempered any strong supply benefits to the various fiscal measures passed by Congress.

Moving the infamous dots: three or four rate hikes?

Along with the policy statement and new economic projections, the Fed will also be releasing the FOMC participants’ estimates of where the federal funds rate will lie over the next few years.

While there is some speculation that the dots will move to indicate four rate hikes in 2018 (from three at the December FOMC meeting), it would not be surprising to see the Fed’s median rate hike expectation still showing a total of three 25-basis-point rate hikes in 2018 and two in 2019.

Given the outlook for growth, unemployment and inflation, Oxford Economics believes the Fed will eventually move to four rate hikes in 2018, but it may want to wait a little longer to do so.

Indeed, strong protectionist rip currents in Washington, D.C. could throw a damper on an otherwise solid economic backdrop. The risks from increased trade tensions globally could keep the Fed from a more aggressive stance.

Wildcards: Rethinking the frameworks for inflation, “live” meetings and balance sheet normalization?

Powell’s first press conference will also shed light on the new communication style at the Fed. From his testimony to Congress, we can expect a more direct tone, and we may also learn more about three central topics:

First, Powell may also shed some light on the internal discussions around the Fed’s inflation target framework — alternatives, preferences and challenges.

Second, there is some speculation that Fed may add a press conference after every FOMC meeting, rendering each meeting “live.” This would remove the implicit market assumption that the Fed’s rate hike decisions only come during FOMC meetings with press conferences (March, June, September and December).

Third, the Fed chairman may share some insights on the Fed’s assessment of the balance sheet normalization process — whether it is satisfied with the current incremental cap system and whether it will want to pursue the same strategy for the remainder of the year.

Gregory Daco is the chief U.S. economist for Oxford Economics, an economic research firm.