03.02 Weekly Viewpoint : The FOMC meeting brought no changes

The FOMC meeting brought no changes: stable rates, positive assessment of the economic picture, increasing confidence in the sustainability of the recovery and in a gradual rise of inflation towards to 2%……

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The Committee is keeping a low profile with respect to President Trump’s frenzy of activity. The statement does not even mention the uncertainty clouding fiscal policy, highlighted in many Fed speeches and in the December minutes. More information on the economic policy scenario will come with Yellen’s testimonies before Congress (14 and 15 February), with the FOMC meeting minutes (22 February), and Trump’s address during a joint session of Congress (28 February).

The January Employment Report surprised on three fronts: stronger payrolls, higher unemployment, slower wage growth. But the mix is positive and will allow the Fed to stick to a gradual rate path.

As expected, the FOMC meeting brought no changes, and no new indications on monetary policy strategy. Risks are still considered to be “roughly balanced”. The only changes to the statement concerned the macroeconomic assessment, which reflected greater confidence in the sustainability of the recovery and in the achievement of policy goals. Based on the statement, economic activity “has continued to expand at a moderate pace”, with moderate consumption growth and persistently weak investments. However, improving sentiment is acknowledged. For what concerns the Fed’s mandate goals, the statement notes that employment continues to grow at a solid pace, and that inflation is on the rise, albeit still below 2%. With respect to the scenario, the Committee expects that, with gradual adjustments in the stance of monetary conditions, “labour market conditions will strengthen somewhat further, and inflation will rise to 2%”: the wording of the December statement was: “inflation is expected to rise to 2%”. The change in verb tense signals that confidence in the price scenario has significantly increased, an especially important development in a context in which the dollar has been clearly strengthening.

Otherwise, the statement is very much in line with the December one: specifically, no mention is made of the uncertainty clouding the fiscal policy scenario. The text stresses once again that the path of interest rates will be dependent on current and expected economic conditions, and on “financial and international developments”. The Committee has opted to keep a particularly low profile, as it waits for more information on the policies the new administration intends to pursue. Given the lack of new signals from the FOMC, focus has now shifted to the next important events: Yellen’s testimonies before Congress (14 and 15 February), the publication of the FOMC minutes (22 February), and Trump’s speech before a joint session in Congress (28 February). Yellen’s testimonies will provide more information on the FOMC’s scenario, conditioned by the evolution of fiscal policy. Trump’s speech before Congress could sketch out the administration’s priorities, clarifying whether the populist element of the manifesto (protectionism and immigration), generally detrimental for the growth scenario, will be integrated soon by more strictly fiscal themes (taxes and spending).

The January Employment Report surprised on three fronts, in different directions: stronger payrolls, higher unemployment, slower wage growth. In part the surprises are due to the population revisions and overall don’t change the positive labor market picture. Non-farm payrolls increased by 227k (3 m ave: +183k). The employment trend was positive across the private sector (total +237k, services +192k, manufacturing +5k, construction +36k, mining +4k) and negative only in the public sector (-10k). Employment in the household survey fell by -30k: the figure is influenced by the population revision. Net of this effect, employment would be up by 457k. The labour force is up by 76k, and the participation rate rises to 62.9% (also due the population revision). The unemployment rate increases to 4.8%, with stronger participation and weak employment, again due to the population revision. Hourly wages were up by only 0.1% m/m, notwithstanding higher minimum wage in many states. Hours worked increased by 0.2% m/m and point to higher industrial production. Taken together, data are positive. Higher unemployment is tied to higher participation, so it is not worrying. Payrolls would be “too strong”, but are moderated by the participation data. Wage growth will pick up again, as indicated in all business surveys. In our view, the data mix in January is the best of all possible worlds, and will allow the Fed to stick to its gradual rate path.

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