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31 Jul 2014
FOMC, ticking all the boxes - Rabobank
FXStreet (Guatemala) - Analysts at Rabobank noted that, as expected, the FOMC decided to taper its asset purchase program by another $10bn, and predicts future moves as follows:
Key Quotes:
“Unless there is a major change to the economic outlook, the pace of tapering is expected to remain at $10bn/meeting. At this pace, we should see the end of QE3 by the meeting in October with a final taper of $15bn. The minutes of theJune 17-18 meeting confirmed our view”.
“However, tapering is no longer a major market mover and instead attention has shifted to the first rate hike. The debate about the first rate hike is essentially a debate about slack in the economy. The doves in the FOMC think that there is still a lot of it, so they now expect to hike in the summer of 2015. The hawks think that slack is much smaller and this could push up inflation. Therefore, they prefer to hike earlier”.
“While the hawks have been very vocal in calling for an earlier rate hike, the doves have an overwhelming majority in the Committee. Meanwhile, their debate about the amount of slack in the economy has shifted to wages. Year-on-year growth in average hourly earnings was cut in half in 2009 and has moved sideways around 2% since then. As long as wage growth remains muted, the doves will see this as evidence of ample slack and consequently they won’t be in a hurry to start hiking the fed funds target rate”.
“More generally, the doves in the FOMC want to make sure that there are no remaining weaknesses in the economy before the central bank unleashes its hiking cycle. However, they may be asking a little too much from this recovery. The economy came out of recession in the summer of 2009, but the recovery has been uneven and disappointing on average. Therefore, we remain skeptical of the linear recovery that is implicit in the FOMC’s projections. What’s more, the Committee also wants 200Kplus nonfarm payroll growth, substantially reduced wider measures of unemployment (such as U6), stronger wage growth, and a sustained housing market recovery. At the moment, the last three criteria are not met (we learned earlier this week that house prices have fallen for the first time since February 2012). Most likely, not all of the Committee’s projections and criteria will be met by mid-2015, so for now we stick to our forecast of a 2015Q4 start of the hiking cycle. Keep in mind that the Fed has been too optimistic about the recovery and premature in signaling its next policy steps several times before”.
Key Quotes:
“Unless there is a major change to the economic outlook, the pace of tapering is expected to remain at $10bn/meeting. At this pace, we should see the end of QE3 by the meeting in October with a final taper of $15bn. The minutes of theJune 17-18 meeting confirmed our view”.
“However, tapering is no longer a major market mover and instead attention has shifted to the first rate hike. The debate about the first rate hike is essentially a debate about slack in the economy. The doves in the FOMC think that there is still a lot of it, so they now expect to hike in the summer of 2015. The hawks think that slack is much smaller and this could push up inflation. Therefore, they prefer to hike earlier”.
“While the hawks have been very vocal in calling for an earlier rate hike, the doves have an overwhelming majority in the Committee. Meanwhile, their debate about the amount of slack in the economy has shifted to wages. Year-on-year growth in average hourly earnings was cut in half in 2009 and has moved sideways around 2% since then. As long as wage growth remains muted, the doves will see this as evidence of ample slack and consequently they won’t be in a hurry to start hiking the fed funds target rate”.
“More generally, the doves in the FOMC want to make sure that there are no remaining weaknesses in the economy before the central bank unleashes its hiking cycle. However, they may be asking a little too much from this recovery. The economy came out of recession in the summer of 2009, but the recovery has been uneven and disappointing on average. Therefore, we remain skeptical of the linear recovery that is implicit in the FOMC’s projections. What’s more, the Committee also wants 200Kplus nonfarm payroll growth, substantially reduced wider measures of unemployment (such as U6), stronger wage growth, and a sustained housing market recovery. At the moment, the last three criteria are not met (we learned earlier this week that house prices have fallen for the first time since February 2012). Most likely, not all of the Committee’s projections and criteria will be met by mid-2015, so for now we stick to our forecast of a 2015Q4 start of the hiking cycle. Keep in mind that the Fed has been too optimistic about the recovery and premature in signaling its next policy steps several times before”.