Fed Chair Janet Yellen said she and her colleagues have been keeping tabs on the progress of tax policy and in fact have been incorporating developments into their forecasts all year. But the boost to the 2018 estimate, she said, is not sue solely to the prospects for tax cuts.
“There is considerable uncertainty about the impacts, and that will have to be monitored over time,” the outgoing chair said at her final post-meeting news conference Wednesday.
However, some on Wall Street think the Fed is being overly cautious.
Jan Hatzius, the chief economist at Goldman Sachs, contends the Fed will be forced into more aggressive policy tightening than current forecasts indicate. According to the quarterly summary of economic projections released this week, officials are eyeing three interest rate hikes in 2018, followed by two apiece the following two years.
“We think the monetary policy projections may be lagging the economic projections, perhaps in part due to political sensitivity,” Hatzius said in a note to clients.
Officials may be unwilling, that is, to mark up their growth expectations too aggressively for fear of looking like they are endorsing Congress’s fiscal policy. Yellen has worked assiduously to keep out of the intense fray on Capitol Hill.
What’s emerged has been a disparate level of expectations for the course of Fed policy.
Traders in the Fed funds futures market anticipate two hikes next year, the Fed itself has pointed to three, while Hatzius and a growing number of his peers expect four. Economists Krishna Guha at Evercore ISI, Paul Ashworth at Capital Economics and Brian Coulton at Fitch Ratings each said after the meeting that they see four hikes ahead.
Mike Loewengart, the vice president of investment strategy at E*Trade, predicted “this is a battle the Fed will be fighting well into next year,” when Jerome Powell takes Yellen’s position as chairman.
“Typically you don’t have monetary tightening occurring when the government is on the cusp of accommodative fiscal easing through tax reform,” Loewengart said.
For the 2018 group of Fed voters, the calculus will be weighing between economic growth, inflation and the upward pressure of aggressive growth policies on Capitol Hill.
“On one hand the Fed has upgraded its forecast of GDP growth and unemployment, on the other inflation just won’t budge. This is the conundrum that Powell inherits as they aim for three gradual increases in 2018,” Loewengart said. “Not an easy task by any means, especially with two Fed officials refusing to buy into the ‘rock solid economy’ story. It may also be more complex than many believe.”
WATCH: Analyzing where the Fed sees growth in the years ahead.