As expected, the FOMC meeting left rates unchanged, with a unanimous vote by the Committee, and only marginal changes to the statement, which acknowledges a strengthening of the recovery and higher market inflation expectations. The message is clear: more hikes are coming……
The assessment of the economic picture remains very positive and, as in December, economic activity is described as growing “at a solid pace”. In judging the various demand components, the wording used is compatible with mounting confidence in the growth cycle: “gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low”. On inflation, while acknowledging that it remains below 2%, the Committee stresses that market expectations have recently picked up, although they are still low. Going forward, the FOMC says that “labour market conditions will remain strong” and that “inflation is expected to move up this year”. The press release does not mention the fall in inflation anymore. Risks remain roughly balanced, while the Committee is “monitoring inflation developments closely”.
Given the unchanged macro picture, policy implications are also unchanged. The Committee expects the evolution of economic conditions to “warrant further gradual increases in the federal funds rate”. The only change is the addition of the adjective “further”, which stresses the upside path of rates.
What the statement does not say is more important than what it says. There is no mention of the dollar, oil prices, tax reform, deficit and debt, nor of tariffs and global trade, nor of the financial markets. The statement ignores all the themes which have come to the fore since December. The minutes will tell of the reasons behind this silence. One is probably the change at the helm of the Fed, with Yellen at her last meeting as chair, to be replaced by Powell next week. Another reason may be uncertainty over the persistence and effects of these factors on the evolution of the scenario.
The minutes will be important in detecting any changes in opinion on the risks to the growth and inflation scenarios, as well as on the interest rate path. However, in light of the macroeconomic data already at available, the forecast for a fed funds hike in March remains unchanged.
In any case, the overall picture in six weeks’ time, on occasion of the next meeting, could be rather different from what it is now, on several fronts: dollar, debt ceiling and spending law, NAFTA, financial conditions. Therefore, the FOMC’s silence on the new themes of the year is reasonable, in waiting for developments on all these fronts, which are complementary to the evolution of data, but which could significantly influence the pace of rate hikes in the second half of the year.
For now, the Committee is refraining from sending messages which could disrupt market expectations, by now almost aligned with the median forecast of three hikes: let sleeping dogs lie (at least until further information will be available). One point is clear, more hikes are on the way.
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