The week from 11 to 15 December has been the heaviest of the year in terms of monetary policy events. Here are the main takeaways from the meetings:
• This is the first year for which the Fed has done the number of hikes it announced one year before (in Dec. 2016, the median ‘dots’ pointed to 3 rate hikes in 2017: the Fed has done them in 2017). In the previous years, the Fed did much less than what the ‘dots’ indicated. FOMC members expect 3 other rate hikes in 2018 and 2 in 2019.
• FOMC members have revised up strongly their GDP growth forecasts (2.4% for 2018 & 2.1% for 2019. This indicates the belief that the slack in the labor market will continue to diminish. The FOMC statement indicates that the future Fed actions will allow the labor market conditions to remain strong and not anymore that they would support “some further strengthening”.
• This was the last press conference of Janet Yellen as FOMC chair. There remains a question mark about how the future composition of the Board of Governors will impact the conduct of monetary policy.
• “The recent news in the macroeconomic data has been mixed : i) some economic activity indicators suggest GDP growth in Q4 might be slightly softer than in Q3 and ii) the labour market remains tight, and surveys suggests this will continue”
• “The MPC judges that inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.”
• “The Committee remains of the view that were the economy to follow the path expected in the November Inflation Report, further modest increases in Bank Rate would be warranted over the next few years, in order to return inflation sustainability to the target”.
The main conclusion is that the major central banks are clearly more optimistic on the growth outlook (substantial upgrade of growth forecasts) while they remain rather cautious on the inflation outlook. The evolution of core inflation in the coming months will be decisive for the Fed and the ECB.
The start of the monetary policy normalization by the Fed at the end of 2015 has led to an expectation about further rate hikes in 2016. After the market shaken up observed at the beginning of the year, the projections for the fed funds from FOMC members were revised downward for all the horizons but still the FOMC members expect two hikes whereas the markets expect only one.
Bastien DRUT, Roberta FORTES
On September 21, the FOMC decided not to hike the fed funds, even it the statement “judges that the case for an increase in the federal funds rate has strengthened.” The committee has “decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
Fixed Income and FX Strategy