Specifically, Hatzius cites easing financial conditions, continued optimism that the Trump agenda will be put into action at some point, and a tightening labor market that will push the Fed to act.
Indeed, the Chicago Fed’s financial conditions index is showing the loosest readings since around December 2014. The Atlanta Fed’s wage growth tracker, while falling from October through February, ticked back up in March to show a 3.4 percent gain.
And the Fed broadly, in its periodic Beige Book report Wednesday on financial conditions across the eight districts, mentioned “wage increases” a dozen times, and always in conjunction with upward pressure to varying degrees.
Trump’s success in Congress remains, however, the wild card in the bunch. However, Hatzius holds a view recently also espoused by Moody’s Analytics economist Mark Zandi that, at the very least, the most growth-stifling parts of the Trump agenda have become less threatening.
“While the growth-positive aspects of the Trump agenda have hit rougher air, the growth-negative aspects also look less concerning,” Hatzius said. “In particular, the specter of protectionism — a major source of concern during the transition especially for trade with China and Mexico — has clearly receded in recent months.”
Still, the perception persists that the Fed is overestimating the economy’s growth capability.
David Rosenberg, the senior economist and strategist at Gluskin Sheff, believes the U.S. is in a late-stage expansion that will be threatened by further Fed tightening.
“Unless you think the business cycle has been repealed and that there will be no repercussions from the Fed tightening into a 3 percent to 4 percent nominal GDP growth environment, or that we will see gridlock end in Washington and all the Trump pro-growth policy proposals coming to fruition, then there is little reason to believe that the U.S. economy will break out of its current malaise,” he said.
Fed Chair Janet Yellen, who has maintained a tight consensus during her time leading the FOMC, likely will remain focused on inflation pressures and the jobless numbers.
In fact, low GDP numbers haven’t bothered the Yellen Fed very much. The December 2015 hike came amid 0.9 percent quarterly growth, while the March move came in a period also unlikely to eclipse a 1 percent gain.