Chairman Powell held his first press conference following the FOMC meeting. It was more concise but just as informative as those of his predecessor. As expected, the FOMC raised the target range for the federal funds rate by 25 basis points, and Chairman Powell delivered a message consistent with his recent testimony, reflecting a continuity in policy. His words may have been somewhat different from Yellen’s, but the message was essentially the same: the economy continues to improve; labor markets are tight; inflation is below target, and the return to policy normality will be gradual.

Interestingly, although the FOMC rate hike was widely anticipated, pundits and markets had a range of reactions to the hike and the message delivered. Some interpreted the decision and related materials as dovish: “Dollar Tumbles After Expected Rate Hike Due to Dovish Fed ‘Dot Plot.’Others put a hawkish spin on the action: “3 Utilities Stocks to Brave Powell’s Hawkish Rate Stance.” How could such divergent reactions be derived from the same press conference and SEP data that accompanied the FOMC’s decision? Part of the answer may lie in what information was given the most weight. Those who put a hawkish spin on the decision concentrate on the fact that the FOMC’s dot chart for 2018 kept three rate hikes penciled in, and 2019 showed four more hikes, with the median federal funds rate peaking at 3.4% in 2020. The more dovish interpretation focused more on Chairman Powell’s press conference, where he indicated that the FOMC would be willing to see inflation run somewhat above its 2% target and noted that growth may have moderated a bit from what it appeared to be late last year.

Perhaps the most relevant aspect of Chairman Powell’s press conference was the fact that he emphasized that the pace of policy normalization would be gradual and data-dependent. Furthermore, he stated that the FOMC would be flexible, that the risks to the forecasts were roughly balanced, and that there was considerable uncertainty as to whether there was, at present, a strong linkage between tight labor markets, wage increases, and inflation. He did not see signs of an incipient run-up in inflation that would put the Committee at risk of being behind the curve.

What has not gotten the attention that it deserves, however, is the curious pattern in the various components of the SEP forecasts. That pattern raises questions about how the FOMC sees the relationship between policy changes and their impact on growth and inflation dynamics. To illustrate, the following table shows the median projections for the federal funds rate, GDP, unemployment, and inflation rates over the forecast horizon. Note that despite Powell’s claim that the economy is showing strength, the median GDP growth estimate declines sequentially year by year and bottoms out at 1.8% in the intermediate term. This is an outcome consistent with less than 1% growth in the labor force and a 1.2% rate of increase in productivity and is not at all in line with the administration’s goal of 3% growth.

It is true that the Committee revised up its growth projection for 2018 from 2.5% to 2.7% and for 2019 from 2.1% to 2.4%, but it should be noted that the Atlanta Fed’s GDPNow forecast now sits at 1.8% and has been continually marked down during this first quarter of 2018. Furthermore, the GDPNow projection tends to close in on the actual number as the end of the quarter approaches. If that first-quarter 1.8% GDPNow number is realized, then the remainder of 2018 will have to sustain an annualized rate of growth of over 3.3% rate for each of the remaining three quarters of the year. It is not clear how this result could be realized unless there is a substantial kick from the tax cut and stimulus packages, but Chairman Powell tended to discount those for 2018. And this is also reflected in the face of a declining real GDP growth for 2019 in the SEP forecasts. Note, too, that while growth is expected to slow in 2019, 2020, and over the intermediate term, unemployment is still projected to decline further, to 3.6%, which is substantially below the 4.5% rate expected to prevail in the intermediate term, and many economists believe 4.5% to be a reasonable approximation of the natural rate of unemployment. What would cause unemployment to continue to fall as GDP growth declines, and then what is the scenario that would see unemployment reverse itself to settle in at 4.5% as growth slows to 1.8% after 2020? One possibility would be a reversal in the recent increases in the participation rate, but that is speculative at this point. Is there a recession hidden in the forecasts after 2020, since a recession is normally the only time when unemployment increases and inflation declines? Finally, this scenario of declining GDP, declining unemployment, and a negligible increase in inflation is supposedly to be brought about by substantial and continual increases in the federal funds rate from 2.1% in 2018 to 3.4% in 2020. The dynamics of this odd scenario are not only outside the bounds of past experience but are also implausible. The only rate scenario that is consistent with the forecasts is a much more gradual and cautious approach to tightening, and even then there is a gap between 2020 and how the Committee sees the economy evolving to its intermediate-term projection. And that gradual, more cautious scenario is made even more likely by the passage of the spending bill and the tariff decisions made after the FOMC meeting.