The FOMC is proving extraordinarily cautious in bringing monetary policy back to normal. The meeting which ended on 17 December yielded a statement containing several important changes…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The main points are:
1) a more data-dependent guidance, but with a wording that limits the scope of the change;
2) a positive assessment of the macro scenario and of the temporary nature of the decline in inflation (tied to energy prices), with a moderate revision of forecasts;
3) US recovery viewed as solid, also in light of the recent international turbulences (Russia, oil trend). During the press conference, Yellen provided some additional information on the path of interest rates. The vote was split, with 3 dissenters and 7 votes in favour.
1) Guidance. In the statement, in line with the October assessment, the current level of fed funds rates is still deemed “appropriate”, and in deciding for how long to keep it unchanged the Committee will assess the new information made available. Reference to the “considerable time” has been removed, with the addition of the phrase: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy”. This was more or less the formulation expected by consensus ahead of the meeting. However, the following sentence undermines in part the step forward taken by removing reference to “considerable time”. In fact, “The Committee sees this guidance as consistent with its previous statement”, which included the “considerable time” wording. Therefore, it is hard to say whether a step forward has been taken or not. Probably it has, and the new formulation, markedly convoluted, is dictated by the intention to proceed with great caution towards normalisation, to avoid a repeat of the “taper tantrum” of 2013. During the press conference, Yellen also gave some indications on timing as part of the guidance, by saying that the Committee considers it “unlikely to begin the normalisation process for at least the next couple of meetings”, although “this assessment, of course, is completely data-dependent”. Yellen also stressed that no meeting is “off the table” to start hiking rates, signalling that the reversal will not necessarily take place at a meeting followed by a press conference (only four a year). Interest rate estimates have been marginally lowered compared to September, although a very large majority of participants believes that the first increase will take place in 2015, and the median projection on rates points to four 25bp hikes in 2015. These indications continue to a spotlight a reversal around mid-2015 as the likeliest outcome, possibly in July, if not already in June (there will be four meetings after the June appointment).
2) The assessment of the macro scenario is improving, with indications that labor slack “continues to diminish”, and downward revisions of the expected unemployment rate levels at the end of 2014 (5.8%) and 2015 (5,2-5,3%). As regards inflation, the rate is observed as staying below 2%, largely due to the trend of energy prices, and market expectations are declining, as opposed to stable survey data on expectations. Inflation should rise back in the wake of improved labour market conditions, and of the waning effects of energy prices and of other factors. The Committee is still “monitoring inflation developments carefully”.
3) During the press conference, Yellen indicated that the US economy is relatively closed and should not be significantly affected by international turbulences (oil and Russia): domestic conditions remain the Fed’s focus in defining the timing of lift-off.
In conclusion, the Fed is cautiously preparing the reversal on rates, which should come in mid- 2015. The marked dispersion of opinions among participants indicates that the strong dissent at the meeting of 17 December will be confirmed in 2015, although the three dissenters will no longer have the power of vote. The main factor in guiding decisions will be the behaviour of nominal variables: inflation will plunge in the coming months (even into negative territory), therefore the Fed will look to wages and labor income with even greater attention. If, as we believe, wages accelerate and the inflation expectations of households remain stable, a gradual upward path of interest rates is likely in the second half of 2015.
Quelle: BONDWorld.ch
Newsletter
