All Eyes On FOMC Meeting
Swissquote Ltd | Mar 18, 2018 09:13
This week Federal Reserve Board Chairman Powell will chair his first FOMC meeting, with likely outcome increasing its target range for the Fed Funds by 25 basis points.
This will be the sixth hike in current cycle and will shift the target corridor upwards to between 1.50% and 1.75%. This move has been widely telegraphed, so participants will likely be interested in projections from FOMC members. Any shifting the 'dots' will have a real effect on asset pricing but limited effect on USD.
There is increased evidence for the Fed to shift 'dots' projections from three to four 25bp hikes in 2018. Incoming economic data indicates there has been some softening in economic outlook in 1Q 18 (due to prior interest rate tightening). Real GDP growth is tracking between 1.8 and 2.0% annual.
Monthly retail sales contracted -0.1% m/m while February housing starts, an early indicator for tightening financial conditions, indicated a -7.0% fall. These are clear warning signs from the US households. However, this data was collected prior to US President Trump Tax Reform (fiscal stimulus).
In Fed Chairs Powell’s hawkish testimony before Congress, he provided a significantly upgrade in growth forecasts. This came after the FOMC published their December economic projections. Powell indicated that prior policy was focused on pushing inflation back toward their 2% target but moving forward emphasis must be on keeping the economy from overheating.
Even well known dove Governor Brainard is now in agreement that downside risks, visible only two years ago had faded. Moving forward with cautions was less critical.
Fear of overheat might be squarely focused on tightening labour markets. Stable/low participation rate in past years had given Fed members a level of comfort. Providing a high level of slack in the economy. Yet, recent data indicates that participation of persons aged 25-54 (generally most discouraged demographic) has increase significantly. In the past, this disenfranchised segment had ensured that wage growth remained weak.
With the Fed expecting unemployment for fall to 3.9% by the end of 2018, the risk of overheating has become high. Fed 'dots' shifting upwards is a high probably.
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