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Fed Speak(s) - February 27, 2018

Fed Speak(s)

As policy wonks and market participants desperately parsed every word of Jerome Powell’s Humphrey-Hawkins testimony for any clue on the future path of policy they almost certainly overlooked  the official Monetary Policy Report, which was released in conjunction with his appearance. This is a true treasure trove of data and a key look into not only how the Fed thinks, but the sorts of inputs they use in their models. Coming in at a more-than respectable 54 pages of content, the report covers a wide range of topics and gives a brief look behind the curtain.

For inflation, the usual boilerplate was brought out:

“Consumer price inflation has remained below the FOMC’s longer-run objective of 2 percent. The price index for personal consumption expenditures increased 1.7 percent over the 12 months ending in December 2017... However, monthly readings on core inflation were somewhat higher during the last few months of 2017 than earlier in the year.”

But underneath those numbers:

“Inflation momentum was also supported by nonfuel import prices, which rose throughout 2017 in part because of dollar depreciation [i.e. there are consequences from the Administration’s crude attempts to weaken the dollar]. That development marked a turn from the past several years, during which nonfuel import prices declined or held flat. In addition to the decline in the dollar, nonfuel import prices were driven higher by a substantial increase in the price of industrial metals. Despite recent volatility, metals prices remain higher, on net, boosted primarily by improved prospects for global demand and also by government policies that restrained production in China.”

This may get even more interesting in the coming months as the Commerce Department recently released reports on steel and aluminum imports. Initiated last April in the interest of national security, both reports resulted in recommendations of tariffs. While the White House maintains that no official decision has been made, President Trump made comments in support of potential tariffs during a recent business session with governors:

“I want to bring the steel industry back into our country.  If that takes tariffs, let them take tariffs, okay?  Maybe it will cost a little bit more, but we’ll have jobs.  Let it take tariffs.  I want to bring aluminum back into our country.  These plants are all closing or closed.”

Even if inflation doesn’t spark your fancy, the Report is worth a glance, addressing everything from financial conditions, productivity, and NAIRU, to Global Equity Markets and Monetary Policy Rules.