FOMC – Few but important changes to the statement pave the way for a hike in the summer. BoJ – Stimulus unchanged, despite the downward revision of the growth and inflation outlook…….
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The April FOMC meeting came to an end, as expected, leaving rates unchanged, once again with E. George dissenting and in favour of an immediate 25bp rate hike. The statement featured only a few, but important changes, and points to easing the concerns that had stopped the rate hikes in January and March, both at the domestic and international level.
Assessment of the economic picture. The statement starts out by remarking that “labour market conditions have improved further even as growth in economic activity appears to have slowed”. The moderation of household spending was highlighted, although real disposable income has strengthened and confidence is at persistently high levels. For what concerns investments, a further improvement was recorded in the residential segment, as opposed to weak non-residential investments; net exports are also still making a negative contribution. On the whole, the prevailing message is positive: “a range of recent indicators, including strong job gains, point to additional strengthening of the labour market”. This implies that the strength of the labour market is prevailing over weak GDP growth. Tones are more cautious on the price trend, and comments limited to the simple observation that “inflation has continued to run below the objective”. The Committee does not want to make a commitment on this front, and stands by Yellen’s side in wanting to wait for further evidence to confirm that the recent recovery in inflation will last.
Risk assessment. The statement did not go so far as to make a new assessment of risks, but went very close. The main change is the removal of any reference to global conditions as a risk factor. In this case, omissions count more than affirmations: the section on the outlook says that “the Committee continues to closely monitor inflation indicators and global economic and financial developments”, whereas in March it said that the Committee continued to “monitor inflation developments closely”, and that “global economic and financial developments continue to pose risks”. The deletion of this latter sentence says more than a thousand words. An entire phrase was also struck off from the opening section, which observed that growth was advancing at a moderate pace “despite recent economic and financial developments”: reference to these external factors is no longer made.
In the statement, the evolution of the US economy is back at centre-stage, while “global developments” are side-lined, signalling that the picture is now more predictable and under the Fed’s control. Expectations for a further improvement in labour market conditions, despite disappointing growth, increasingly signals a persuasion that the full-employment objective has virtually been achieved. The April Employment Report, which will be published on 6 May, should add further positive indications. Data still needs to be collected on the inflation trend, although the rise in energy prices, the depreciation of the dollar, and the easing of financial conditions since the beginning of the year, are mutually supportive and will help approach the 2% goal. As reported by the minutes, in light of interest rates that are still very close to zero, the adjustment of monetary policy is “asymmetrical” in its approach: better to hike rates too late than too soon. Therefore, the FOMC wants to see, and not only predict, the gradual recovery of inflation. Conditions for another interest rate increase should fall into place by the summer, possibly in July, if not already in June.
The BoJ meeting also left existing monetary stimulus conditions, although the central bank’s attitude was surprisingly passive, given the weak growth picture and the on-going appreciation of the exchange rate. The assessment of the economy is brighter than outlined by recent data, and a moderate growth trend is still acknowledged, supported by domestic demand. GDP and inflation forecasts have been revised downwards for 2016, and downside risks are pointed out. The BoJ may be waiting for information on a likely supplementary Budget, and on a possible postponement of the consumption rate hike. In our view, the door remains open for an increase in monetary stimulus in June or July.
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