As expected, the FOMC meeting left rates unchanged…..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The most important aspect of the statement was the information it omitted: the FOMC abstained from assessing the risks to the scenario, and did not clarify expectations for the interest rate path: starting in March, anything is possible. The statement observed that, while the recovery in the US can continue, “global economic and financial developments” may have potentially negative implications on prices, labor market and risks. The Committee has left open all its options.
Assessment of economic data – The assessment of the economic picture remains positive, although no direct views were expressed on growth. The statement remarks that the labour market has improved further “even as economic growth slowed late last year”, and that consumption and investments grew at “moderate rates”. The housing sector expanded further, whereas net exports and inventories contributed negatively again. The Committee did not explicitly express concerns over the domestic recovery, still supported by strong fundamentals. For what concerns inflation, the FOMC’s view is much the same as it was in December: the price trend remains below 2%, “partly reflecting declines in energy prices and in prices of non-energy imports”. A further correction of market expectations is highlighted, as opposed to “little changed” survey-based longer run expectations over recent months.
Scenario and risks – The view on the scenario has also changed little. According to the Committee’s estimates, “economic activity will expand at a moderate pace (as opposed to: “will continue to expand” in December), and labour market indicators will continue to strengthen”. The FOMC expects “inflation to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2% over the medium term”. The key aspect is the lack of an assessment of risks. Up to September 2015, risks were “almost balanced”; in December, on occasion of the reversal on rates, risks were „balanced”. In January, the Committee is “closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook”. In essence, the FOMC is playing for time in waiting to verify whether market turbulence, lower oil prices, slowing emerging countries, and the stronger dollar, will have serious enough effects to prompt a revision of December forecasts.
Monetary policy guidance – The FOMC believes that the current scenario justifies stable rates at this meeting. The monetary policy stance is unchanged compared to January, with the indication that the timing and size of future rate adjustments will be guided by “realized and expected conditions relative to its objectives of maximum employment and two per cent inflation”. The Committee still expects that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”, while reasserting that it will “carefully monitor actual and expected progress toward its inflation goal”.
In conclusion, the Fed signals that for the time being the US economy may keep recovering at a moderate pace, while implicitly pointing out that the development of global variables(economic and financial) may influence risks to the domestic scenario, therefore slowing the pace of growth and inflation paths on the one hand, and rates on the other. The Fed probably abstained from expressing a view on risks not only due to high uncertainty, but also to the high dispersion of opinions within the Committee. The minutes (out in three weeks’ time, Yellen’s report to Congress on 10 February, and the speeches on the agenda in the next few weeks, will draw a slightly clearer picture of uncertainty and consensus.
In our view, the outcome of the meeting is compatible with a continuation of the rate hike cycle, if not in Marc, in the following months. Our forecast is that a rate hike is possible in April if the price of oil stabilises and if services keep outbalancing the mining and manufacturing weakness. Data will truly be the decisive factor.
Source: BONDWorld.ch
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