Thursday, March 19, 2015

FOMC completes shift to data dependence

As was widely expected the FOMC’s March Statement removed “patient” form its forward guidance on the timing of the first increase in interest rates in the US.  The Committee has now completed the shift in its guidance from time dependence to data dependence.

On the whole this morning’s statement was at the dovish end of expectations – at least if the market reaction is anything to go by.  The Committee’s assessment of economic activity was softened somewhat with growth having “moderated somewhat” with weaker export growth mentioned specifically.

The new Summary of Economic Projections (SEP) lowered forecasts for real GDP growth and inflation over the 2015-17 period.  As we expected they also lowered the range for the long-term unemployment rate from 5.2-5.5% to 5.0-5.2%.  With the unemployment rate already at 5.5% it would prove difficult from a communications perspective to persist with zero interest rates with the unemployment rate already at trend.

The Committee stated a rate hike in April was unlikely and they would hike “when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”. So an increase in interest rates is coming – it’s just question of when.

Recent inflation data seemed to us to shift the timing of the first rate increase out from June to September as there appeared to be an element of spill-over from  lower fuel prices into core inflation.   At the same time the recent strong labour market data appeared to not completely dismiss the possibility of a June “lift-off”.
 
We have also been unconcerned about recent weakness in retail sales as stronger employment, hours worked and (albeit modest) wage gains suggests strength in consumer spending in the period ahead.


Today’s press statement appears to shift the balance of probabilities for the first rate hike further towards September (or later?).  But with the Fed now completely data dependent, it’s a case of watch this space...