As expected, the Federal Reserve raised rates by 25 basis points. Michael Dolega, Senior Economist, TD Bank, talks to Sara D’Elia about how the language in the Fed statement evolved, why it was seen as ‘hawkish’ and what it could mean for the U.S. dollar and Loonie. The TD Economics report is available here.
Thanks for having me.
Now, I want to start off with a bit of a different interview with you today. I want to talk a lot about language from the FOMC. When it comes to their view of economic activity, they actually quoted it as rising at a solid rate. What's your take on that?
I think that's exactly what you should concentrate on. The language was really key in this statement.
The Fed really has come out appearing to be very, very comfortable with what's going on. The pace of economic growth is accelerating. Second quarter growth is probably going to be close to 4%. Unemployment is dropping. And inflation is actually rising.
So all those things, all the checkboxes, so to speak, are definitely coming in.
And so the Fed is definitely paying attention to that. And they seem to be happy about it, and more comfortable with tightening policy.
Another term getting a bit of attention is symmetric when it comes to inflation. What does that mean?
Well, it's interesting that you mention that. The Fed actually added that word.
They mentioned it in the previous statement. They added it fully to this statement in front of their objective. It's an important addition, because I think it speaks to the Fed wanting to communicate to investors that they're OK with inflation overshooting a little bit.
So in the previous years we talked about inflation undershooting. It's done so for several years. I think at this point that symmetric means that, hey, listen, it can overshoot. We're not going to cry about it, and not going to panic.
So they want to make sure that investors are aware of that. And so I think that's why they want to remind it with that addition of the word symmetric.
The final piece from a language perspective that's getting a lot of attention is forward guidance. And in this case, it was completely cut. How are investors to perceive that change?
Yeah. I think it makes sense. I mean, at this point the forward guidance was there in extraordinary circumstances, basically letting investors know that, listen, rates are going to be low, and if they rise, they're going to rise very, very gradually to still a very low level. At this point we're getting up to 2%. It's not exactly the lowest level. So I think it was time for it to be taken out. So I think it was a good move.
Having said that, it has removed 100 words from the statement, or about a quarter of it. So it's definitely a much more terse document now, which is not necessarily a bad thing.
And when you take all of this, the market perception really today and headlines were swirling that we've gone from one more rate hike in 2018 to there might be two, how do you sort of sum up what we've heard? What's your call going forward?
Yeah. I think at this point, what you're saying, from one more rate hike to two more rate hikes, basically. So a total of four, potentially.
I think at this point, we still think the statement suggests that, yes, there's more of a chance that that's going to happen. But we're not fully convinced yet that that will be the reality. There's a lot of things that might still go wrong. There's trade issues. There's a number of things that are on the horizon that might still prevent the Fed from following through on that projection. So we're not yet convinced.
And one thing you did talk about though is it does present some risks or some potential changes when it comes to your currency outlook. What can you tell us about both the US dollar and the Canadian dollar, or the loonie?
Well, I think the more comfortable Fed, the more hawkish Fed really definitely speaks volume to the fact they've opened the door for a faster pace of rate hikes going forward.
So from that standpoint, it's a good thing for the greenback. Not so good for the loonie.
All right. Thanks very much, Michael.
Thanks for having me.