Special Fed Coverage: Powell Press Conference

Summary

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WSJ Your Money Briefing – Special Fed Coverage: Powell Press Conference

Date: March 21, 2018
Host: JR Whalen (The Wall Street Journal)
Guest: Bill Stone, Chief Investment Officer, Stone Investment Partners

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Episode Overview

This special edition of WSJ Your Money Briefing centers around the Federal Reserve’s decision to raise short-term interest rates by a quarter percentage point and the first press conference by new Fed Chairman Jay Powell. The episode explores the implications of the Fed’s rate hike projections, the outlook for inflation and wages, and key takeaways for investors navigating potentially multiple rate increases over the coming years.

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Key Discussion Points and Insights

1. Fed’s Rate Hike Announcement & Market Implications

• The Federal Reserve raised short-term interest rates to a range between 1.5% and 1.75%.
• The Fed signaled that four rate hikes in 2018 remain a possibility, though not definite.
• The market responded positively due to the lack of a firm commitment to four hikes.

“On Wednesday, the Federal Reserve announced it will raise short term interest rates a quarter percentage point ... and said four interest rate hikes this year remain a possibility.”
— JR Whalen (00:31)

2. Jay Powell’s Approach to Rate Hike Projections

• Powell emphasized the uncertainty and adaptability of economic forecasts, highlighting that projections may change as economic conditions evolve.
• He downplayed the significance of the Fed’s “dot plot” projections, suggesting less confidence about projections for longer timeframes.

“Like any set of forecasts, those forecasts will change over time and they'll change depending on the way the outlook for the economy changes.”
— Jay Powell, via press conference (01:04)

• Bill Stone noted that Powell was keeping his options open and trying to de-emphasize the dot plot, especially for longer-term projections.

“I think he's trying to keep his options open. I also think he was trying to de-emphasize a little bit in some of the moves ... People kind of zone in on those and talk that back a little bit because I think he even said later, hey, you know, going out that far, you have much less confidence in what we'll end up doing.”
— Bill Stone (01:38)

3. The Fed’s Inflation and Wage Growth Outlook

• The Fed expects inflation to surpass 2% in the coming years, but Powell sees no current signs of accelerating inflation.
• Wages have risen only moderately, and while wage growth remains a watchpoint, it’s not yet a major concern for the Fed.
• The Fed is alert to the risk of inflation accelerating if unemployment stays well below sustainable levels for a long period.

“There's no sense in the data that we're on the cusp of an acceleration of inflation. We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that. We'll be alert to that.”
— Jay Powell, via press conference (03:03)

• Stone emphasizes that, despite low unemployment, wage growth hasn't matched historic patterns, and that Fed messaging aims to avoid panic about an inflation spike.

“You're right, we just really haven't seen the kind of wage growth ... at this kind of unemployment rate. So ... it doesn't expect some sort of spike in inflation that you should fear.”
— Bill Stone (03:44)

4. Investment Strategy Amid Rate Hike Uncertainty

• With the prospect of three to four increases, investors should anticipate higher yields, particularly affecting short-term rates with relatively high confidence and likely upward pressure on longer-term yields.
• Financial stocks are highlighted as potential beneficiaries in a rising yield environment.

“You think those yields are going to move up. So I think it makes sense to think about what, you know, what may benefit from higher yields. Let's just say the financial stocks continue to be beneficiaries if you continue to see yields move higher.”
— Bill Stone (04:53)

5. Dot Plot and Market Sentiment

• The Fed’s internal estimates (“dot plot”) show the average expectation for rate increases moving up, even as the median remains at three for 2018.
• The market is closely watching for a possible shift to four hikes since sentiment could change rapidly based on economic data.

“The median number, which is the number we always talk about, stayed the same at three hikes, but we're only a hair away from four. And that's what the market is going to definitely wrestle with over time.”
— Bill Stone (05:43)

“Three is baked into the market but four might not be.”
— JR Whalen (06:24)
“Yes ... Really is based on whether the economy or whether the market thinks the economy can handle it.”
— Bill Stone (06:29)

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Notable Quotes & Memorable Moments

• “There's no sense in the data that we're on the cusp of an acceleration of inflation.”
  — Jay Powell (03:03)

• “I think that's really the million dollar question, or do we have to call it billion or trillion-dollar question when you follow the Fed?”
  — Bill Stone (05:42)

• “Three (rate hikes) is baked into the market but four might not be.”
  — JR Whalen (06:24)

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Key Timestamps

• 00:31: Announcement of Fed rate hike and summary of Powell press conference
• 01:04: Jay Powell statement about forecast uncertainty
• 01:38: Bill Stone’s view on Powell’s communication strategy and dot plot de-emphasis
• 03:02: Discussion on inflation and wage growth outlook
• 03:03: Jay Powell addresses current inflation and wage data
• 04:53: Bill Stone on investment ideas in a rising rate environment
• 05:42: Stone unpacks the significance of the dot plot and market reaction

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Episode Takeaways

• The Fed’s future rate path remains data-dependent as Powell seeks to remain flexible amid economic uncertainty.
• Inflation and wage growth are not signaling imminent risk, suggesting a gradual approach to tightening remains likely.
• The market is comfortable with three hikes, but sentiment may pivot quickly with economic changes.
• Investors should consider sectors likely to benefit from higher yields, like financials.

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This Federal Reserve special edition provided timely insight into the Fed’s decision-making process, the complexity of forecasting, and practical implications for investors and savers alike.

Transcript

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[C]

Your Money Briefing Money and market stories from the Wall Street Journal. Welcome to this Federal Reserve special edition of YOUR Money Briefing. I'm JR Whalen in New York. On Wednesday, the Federal Reserve announced it will raise short term interest rates a quarter percentage point to between one and a half percent and one and three quarters percent and said four interest rate hikes this year remain a possibility. In his first news conference, Federal Reserve Chairman Jay Powell was asked why the Federal Reserve wasn't more definitive in predicting four interest rate hikes this year.

[D]

I think like any set of forecasts, those forecasts will change over time and they'll change depending on the way the outlook for the economy changes. You know, it could be that if the economy is a little bit stronger or a little bit weaker, then the path could be a little less gradual or a little more gradual.

[C]

Bill Stone is chief investment officer of Stone Investment Partners and he joins us to discuss. So Bill, is this Jay Powell sort of hedging his bets or do you think that the Fed is is really expecting maybe not upward to the moon trajectory we've seen from the economy so far?

[B]

I think he's trying to keep his options open. I also think he was trying to de emphasize a little bit in some of the moves that the Fed made around their so called dot plot projections. So while the projections for 2018 stayed on the median unchanged, they actually moved up on the whole. So the average projection moved up pretty significant significantly. Also, the median number of hikes for 2018, I'm sorry, for 2019 and 2020 moved up. So I think he was trying to also deal with the fact that people kind of zone in on those and talk that back a little bit because I think he even said later, hey, you know, going out that far, you have much less confidence in what we'll end up doing.

[C]

Coming up next, more from Fed Chairman Jay Powell and how should you play the market as the Federal Reserve weighs three or four interest rate hikes each of the next several years. This is your money briefing from the Wall Street Journal. Welcome back, everybody. And the inflation rate has been sort of a moving target for the Fed. They have been eyeing 2% inflation for a long time. And Jay Powell came out today and said that the Fed expects inflation to surpass 2% next year and in 2020. And he was asked about wage growth and the relatively slow pace of wage growth in this country and whether it is a concern to. And he says that we'll have to watch the unemployment rate and the inflation rate in order to properly gauge wages.

[D]

There's no sense in the data that we're on the cusp of an acceleration of inflation. We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that. We'll be alert to that. I guess the idea, the theory would be that if you get below the sustainable rate of unemployment for a sustained period, you would see an acceleration of inflation. So we would know that then and we're very alert to it, but it's not something we observe at the present.

[C]

So, Bill, so far we have seen unemployment at near record lows and we have seen inflation really held in check for a while. So I guess this means that wages are a concern to the Fed, but it's not sending off any alarms.

[B]

Yeah, I think that's exactly where he tried to go because I think part of also he touched on it because the Fed actually lowered its expectations, in other words, expected unemployment to be even lower than previously at the end of 2019. So I think he wanted to deal with that part. And you're right, we just really haven't seen the kind of wage growth that you've seen in the past at this kind of unemployment rate. So he did go on. He really talked about it there. It doesn't expect some sort of spike in inflation that you should fear. Again, I think trying to walk back and make sure that people don't think there's going to be anything other than just a gradual increase in the fed funds rate.

[C]

When the Fed said on Wednesday that it was projecting three or possibly four interest rate hikes this year, the market spiked because it was not a definitive four. But they're looking ahead to 2019 and 2020, and they're projecting inflation going a little bit higher. They're projecting unemployment to stay around the same. You know, we've seen the market run up aside from the volatility we saw in February, but this is a tough market to really pin down. How would you recommend that folks play this market in the next, let's say in the next six to 12 months.

[B]

I still think it's wise to say, well, you know, the, at least I think we have a very good idea that the direction of yields and you know, obviously short term yields, very high confidence. But I think even longer term yields, you think those yields are going to move up. So I think it makes sense to think about what, you know, what may benefit from higher yields. Let's just say the financial stocks continue to be beneficiaries if you continue to see yields move higher.

[C]

And Bill, also the decision on Wednesday to raise interest rates a quarter percentage point was unanimous. But seven of the 15 Fed participants expect at least four rate increases this year. And it's not a definitive thing. It could be three or it could be four, but they're expecting four. What is your gut feeling as to what the Fed is likely to do going forward?

[B]

Well, I think that's really the million dollar question, or do we have to call it billion or trillion dollar question when you follow the Fed? I think the interesting thing was that dot plot, which is really just the estimates from the various Fed members for the number of hikes or where the fed funds rate is going to be really moved up on average. So the median number, which is the number we always talk about, stayed the same at three hikes, but we're only a hair away from four. And that's what the market is going to definitely wrestle with over time. I think it was happy at the moment that it only got three hikes on the median. But I'd say you have to watch that closely because we're like I said, just a hair away from four.

[C]

Your thought is that three is baked into the market but four might not be.

[B]

Yes, it obviously depends on how the economy plays out, whether the rate hikes or I guess fear of rate hikes shows up in terms of pressuring stocks really is based on whether the economy or whether the market thinks the economy can handle it. So the economy is running very strong. Probably wouldn't have a problem with a fourth rate hike being figured in. If you see some sort of weakening and we've seen the economy come off the fourth quarter, really strong GDP numbers, if you see it come back up, probably wouldn't have a problem with four. But it does depend on what the expectations for economic growth are.

[C]

All right, that's Bill Stone, chief investment officer of Stone Investment Partners. Bill, thanks for being with us.

[B]

Thanks for having me.

[C]

And thank you for listening to this Federal Reserve special edition of your money briefing. I'm JR Whalen in New York for the Wall Street Journal. Deal replaces fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e l.com WSJ.