Highlights
• Patience remains the Fed’s new watchword
• An inverted yield curve demands attention
• Pragmatism rules the day amid recession tug-of-war
Typically, the arrival of April portends the green shoots associated with longer days and sunnier skies of spring. The brackets frenzy of the March Madness ritual also helps usher in the second quarter of the year. Soon, the earnings season takes center stage and analysts and investors alike determine how they expect the rest of the year to unfold. The transition from one quarter to the next is usually fairly straightforward. This year, however, may prove exceedingly different as questions abound over the strength of the global economy, with the U.S. economy—still on solid footing—under the microscope for signs of strength or weakness.
Internet searches for “inverted yield curve” and “recession” have picked up markedly, perhaps helping to explain the unexpected drop of the Conference Board Consumer Confidence Survey at the end of March, despite February’s rebound. While the all-important consumer was more concerned about current economic conditions, including the job market in general, U.S. consumers were more confident about the future. For example, intentions improved for vehicle purchases, as well as home-buying. At the end of March, the University of Michigan’s Consumer Sentiment Index was revised higher, reflecting a more optimistic assessment for both current and future expectations.
The Conference Board’s senior director of economic indicators explained, “Confidence has been somewhat volatile over the past few months, as consumers have had to weather volatility in the financial markets, a partial government shutdown and a very weak February jobs report. Despite these dynamics, consumers remain confident that the economy will continue expanding in the near term. However, the overall trend in confidence has been softening since last summer, pointing to a moderation in economic growth.”
The “Pivot”
The Federal Reserve, in its striking monetary policy “pivot,” at last acknowledged in early January—perhaps indirectly, and perhaps too late—that the market’s message at the conclusion of 2018 was correct in projecting a softening economic landscape that was exacerbated by rate hikes along with balance sheet quantitative tightening (QT). It was becoming increasingly clear in the real economy that the consumer and businesses were suffering under tighter financial conditions brought about by four rate hikes in 2018, coupled with the “$50 billion” monthly drawing down of the Fed’s balance sheet amid a weaker global landscape.
At the December Federal Open Market Committee (FOMC) meeting, two rate hikes for 2019 were projected as Federal Reserve Chairman Jerome Powell said, “some crosscurrents have emerged.” Moreover, despite the strong economic backdrop and expectations for healthy growth, he noted that there were developments that could be signaling “some softening.” Citing moderating global growth that nonetheless was still solid, Powell acknowledged heightened market volatility; however, the developments did not fundamentally alter the Fed’s outlook. Rather, forecasts for growth in 2019 were lowered “modestly.” Still, the Fed raised rates for a fourth time in December 2018 and Powell said that management of the Fed’s balance sheet was on “autopilot.”