17.03 Weekly Viewpoint : FOMC: “the simple message is the economy’s doing well”, and interest rates will continue to rise at a gradual pace

Netherlands: center parties will the core of the next ruling coalition…..


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Intesa Sanpaolo – Research Department For professional investors and advisers only


As expected, the FOMC meeting brought a 25bps rate hike, and the indication that fed funds will continue to increase at a gradual pace this year. No major changes emerged, and the Fed remains optimistic on the economy and cautious in removing stimulus. The Committee continues to consider risks as “roughly balanced”. There was only one dissenter, as expected, as Kashkari voted to keep rates stable. An accurate report on the distribution of opinions within the Committee will only be available with the publication of the meeting minutes, in three weeks’ time. However, before then, eight FOMC participants are already scheduled to speak, and should offer a reliable picture of consensus on the assessment of risks and on the rate path. As Yellen said during the press conference, “the simple message is the economy’s doing well”: economic activity is strengthening consistently, with employment on the rise, expanding consumption, and recovering investments. For what concerns inflation, the 2% goal is closer at hand. The statement reasserted that, even after the hike on 15 March, monetary policy remains accommodative, and will support a further improvement of labour market conditions and a stabilisation of inflation at around 2%. The statement repeats that the timing and size of future hikes will depend on the evolution of data, and on financial and global developments, as has been the case in the past. The only change was made in reference to the monitoring of inflation: the statement now says that the Committee will “carefully monitor actual and expected inflation developments relative to its symmetric inflation goal”. The new reference to the symmetry of the inflation mandate seems dictated by the fact that in the course of the year inflation will temporarily rise above 2%. On this aspect, during the press conference Yellen stressed that the 2% mark is not a ceiling on inflation, which may fluctuate above and below the target rate over time.

For what concerns macroeconomic and interest rate projections, not much has changed, to the market’s considerable relief. In terms of the macro scenario, the longer term unemployment rate was revised to 4.7% from a previous estimate of 4.8%, and forecast core inflation was revised up by one tenth to 1.9% at the end of 2017, with the subsequent path stable at 2%. Median interest rate projections point to two further increases in 2017 (1.4% at the end of the year), three hikes in 2018 (2.1% at the end of 2018) and 3% at the end of 2019 (one tenth higher than projected in December). The dot plot shows widespread consensus on the scenario for 2017, as opposed to wide dispersion on the two following years, which indicates a divergence of opinions on the longer horizon. Yellen once again said that rate projections are not etched in stone and that the evolution of the US administration’s policies could result in changes being made to the expected path. For the time being, the Committee intends to continue along the gradual upward path of the dot plot, and to assess the information provided by the data, on both the evolution of prices and activity, as part of the more general trends.

For what concerns the latest monthly data, we note some divergence between the extremely strong survey data, and the signals sent by information on actual activity, which seem to point to a slowdown in growth in 1Q 2017. On the other hand, signals emerge that pressures on prices are moderately building up. At present, we expect another fed funds hike in June, although the evolution of the data and the lack of information on reforms (in particular the tax reform) could push back the next move to September.

In the Netherlands, Eurosceptics have indeed gained some ground at the elections of 15 March, but without achieving any breakthrough. Overall, the group of center-right parties held up well, and will represent the core of the next majority government after the collapse of the Labour Party. Most european voters are still inclined to give a chance to repair the euro area.


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