American Consequences - May 2018

May 22 The House of Representatives votes on the Senate’s Dodd-Frank reform bill. This is expected to raise the threshold for the systemically important financial institution designation from $50 billion to $250 billion, benefitting community and regional banks. May 23 FOMC minutes from the most recent meeting. Investors will be looking for more inflation talk. Markit releases its preliminary manufacturing, services, and composite Purchasing Managers’ Index (PMI) data in the U.S. and the eurozone. This is a vital gauge for judging the state of global growth. June 12-13 The FOMC meeting in Washington, D.C. It will announce its latest policy update, and investors will be listening to the follow-up press conference and surveying the dot plot release for rate-hike clues. rates unless there is a press conference after the meeting. For the rest of this year, there are press conferences after the June, September, and December meetings... which is an opportunity for three more rate hikes in 2018. The market has already priced-in a June hike, so it’s a matter of September and December. Granted, this doesn’t necessarily mean the Fed will hike rates four times this year. But the bears are saying there’s nothing in the most recent statement to make you think it won’t. We’re going to know very soon.

THE FED’S INFLATION DEBATE IS FRONT AND CENTER... To raise rates quicker than expected or not raise rates quicker than expected, that is the question... The Federal Open Market Committee (FOMC) met once again May 1 and 2 before announcing their latest policy decision... it left rates unchanged but changed the language in the conversation. The key phrase was, “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2% objective over the medium term.” “Symmetric” was the word of focus. The thinking is “symmetric” implies the Fed is willing to let inflation run hot. In other words, inflation has undershot the 2% target for so long, it may be time to let it run over 2% for a commensurate amount of time. But, bear in mind, the Fed must be careful not to let the economy overheat. As May wore on, and Fed speakers hit the road, “symmetric” was a popular topic of conversation. Investors were interested in understanding exactly what the FOMC meant in its statement. Regional presidents Raphael Bostic of Atlanta, John Williams of San Francisco, Loretta Mester of Cleveland, Robert Kaplan of Dallas, and Charles Evans of Chicago all went to great lengths to elaborate. They confirmed exactly what the market thought. They discussed the inflation picture and yield curve at length and are willing to let the economy run hot to make up for inflation undershooting for so long. The hope is that there’s less need to quicken the pace of rate hikes. As we approach the next policy decision in June, remember that the Fed has not raised

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Scott Garliss

John Gillin Greg Diamond

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