FED set on reacting to developments; recent slowdown considered transitory. The timing of the reversal remains uncertain: the string of weak data makes an increase in June unlikely, but not entirely ruled out. Data due out in the next month and a half will prove decisive….
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The FOMC meeting brought no changes. Two key points emerge from the statement: the Fed 1) is now set on reacting to developments, and 2) considers the recent slowdown as having been due in part due to transitory factors.
A regards the first point, the Fed has opened a new phase in monetary policy management: forward guidance is definitively abandoned, and strategy will now be guided, from meeting to meeting, by the evolution of data. Dependence on data had already been signalled explicitly in March, although at the time it was just an indication for the future, as the statement said that a hike was unlikely in April. At the April meeting, on the other hand, no reference is made to dates, and indications are limited to the conditions which would make a rate increase appropriate: a further improvement in labour market conditions, and reasonable confidence that inflation will return towards the 2% target in the medium term.
In this picture, in which the evolution of data becomes paramount in guiding monetary policy decisions, the most important section of the statement is the assessment of the macroeconomic scenario.
As regards the second point, i.e. the evolution of data since the previous meeting, and future expectations, the statement highlights that growth over the winter months, “in part reflecting transitory factors”. A moderation of job gains was also acknowledged, together with a steady unemployment rate and a slowdown in spending growth. However, the real income of households are also confirmed to have risen strongly, and sentiment remains high. Also acknowledged are a slowdown in business investments, a moderation of the residential construction sector, and a drop in exports. For the time being, the FOMC has not altered its baseline scenario, which points to moderate growth driven by spending. Inflation is considered to be staying below the target rate due in part to a decline in energy prices, and in part to the correction of non-energy import prices. This consideration is new, and obviously refers to the consequences of the appreciation of the dollar.
The statement, approved with a unanimous vote, intends to convey the message that the normalisation of monetary policy continues: decisions are data dependent. On this front, the FOMC does not believe that the information gathered in the five weeks between the March and April meetings is sufficient to change the baseline scenario, which points to moderate growth. However, a rate hike will require confirmation that the slowdown observed in the first quarter of the year was truly transitory.
The timing of the reversal remains uncertain: the string of weak data makes an increase in June unlikely, but not entirely ruled out. Data due out in the next month and a half will be decisive. Based on our expectations for a re-acceleration of spending and a return to a GDP growth rate of around 3%, a hike in the summer months is probable. The first test will come next week, with the April Employment Report, which should outline NFP growth in excess of 200k, signalling that the March slowdown was transitory.
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