FOMC at the window. The slowdown is largely transitory, but the lift-off will be entirely datadependent. “Many” participants believe that it is “unlikely that the data available in June would provide sufficient …..
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confirmation that the conditions for raising the target range for the federal funds rate had been satisfied”, although they do not rule out this possibility. June seems too early for the lift-off, but the FOMC will not telegraph a move in advance.
– The minutes of the 28-29 April FOMC meeting do not change the assessment of the economic scenario made in the statement, but provide new indications on the debate on the timing of the rates lift-off. There is widespread consensus within the FOMC that the slowdown observed at the beginning of the year will prove to be largely transitory, and will be followed by a return to a moderately positive pace of growth. The question is when data will meet the conditions deemed necessary and sufficient to allow the rate reversal.
– The most important information emerged from the minutes concerns the timing of the first hike. Data will be decisive, and the minutes draw a more accurate map of participant opinions than was hitherto available. “A few” believe that the information that will become available by the time of the June meeting will be sufficient to meet the necessary conditions for a hike.
However, “many” think it unlikely that the data will provide sufficient confirmation to make the reversal possible, although they “generally do not rule out this possibility”. The Committee discussed the merits of providing explicit indication on the likely implementation of a rate hike in the near term, but most participants believe that the appropriateness of the first increase should be discussed on a meeting-by-meeting basis, and should depend on the evolution of economic data and of the scenario. Therefore, decisions will be taken meeting by meeting, with no pre-emptive “warnings”. In essence, the minutes confirm that the hike will not be preannounced, but also signal that June, while not totally ruled out, is an unlikely date for the lift-off. The first hike will probably come at a later stage.
– The Committee also discussed the equilibrium real federal funds rate, on which opinions differ greatly. The minutes show that “some” participants report historically very low estimates of the equilibrium real rate, and therefore believe that monetary stimulus should be kept in place for longer; on this front, one participant suggested that the inflation goal be raised, but consensus is still for an unchanged inflation goal. Others mentioned possible “transitory” causes for the low estimates of equilibrium real rates.
– As regards the economic scenario, the minutes acknowledge that weakness in 1Q was largely due to transitory factors (weather, port workers’ dispute), but also that uncertainty has increased, whereas certain risk factors linger (effects on investments of the appreciation of the dollar and of the decline in oil prices).
– In conclusion, the FOMC is in a wait-and-see stance, in an uncertain context (as revealed by the debate on the equilibrium rate). Data due out in the next few months will be decisive in determining the timing and pace of rate increases. Our forecast is for a normalisation in the pace of GDP growth around 3%, allowing an initial hike by September.
– As for data, the second estimate of 1Q GDP growth will be released on 29 May, and should bring a sharp downward revision, pointing to a -0.9% q/q ann. contraction, vs. an advance estimate of +0.2% q/q ann. Can a negative 1Q reading significantly push back the rates liftoff? Recently, the credibility of Q1 GDP data has been questioned by analyses by the San Francisco Fed and the Philadelphia Fed, which detected residual seasonality in 1Q data starting from 1985. The downward bias is estimated at 1.6% by the San Francisco Fed and at 1% by the Philadelphia Fed. On top of this correction, the negative contribution of adverse weather conditions and of the Pacific port workers’ dispute should also be added. Despite the doubts raised on the validity of data for the opening months of the year, the slowdown in 1Q increases uncertainty and requires more positive signals from other indicators.
Appendix
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