Fed: “outlook has strengthened” - Westpac
|Analysts at Westpac noted that the Fed says that the “outlook has strengthened”, boosted 2018 and 2019 GDP projections and added a rate hike to their 2019 dot projections.
Key Quotes:
"However the USD has eased, markets evidently bracing for a more hawkish pivot, especially in the 2018 dots - they drifted higher, but not enough to lift the median beyond the existing 3 hikes.
The statement repeats, “further gradual hikes”, risks remain “roughly balanced” and notes the slowdown in Q1, activity characterised as "moderate" vs "solid" back in Dec 2017, but the more important signal is forward looking with a new line; "The economic outlook has strengthened in recent months," echoing Powell's testimony.
The Fed sticks with a median 3 hikes for 2018 but there's a clear updraft - just 2 of 15 dots are below the median versus 6 of 16 below as of Dec 2017. The median for 2018 is very brittle too, the next go around in June only needs a single forecaster at the median to add another hike to push the total in 2018 to 4 hikes. Markets however pinned hopes for a 4 hike signal in 2018 at this meeting.
The 2019 median has risen to 3 hikes from 2, capturing the newfound emphasis on "further" gradual hikes while the terminal rate has drifted higher, to 2.875% vs 2.75% in Dec 2017.
The economic projections show faster growth in 2018 and 2019 (2.7% vs 2.5% for 2018), lower unemployment, 2020 notably projected at 3.6% (vs 4.0% in Dec) and no change to PCE inflation in 2019 and 2020 (1.9% and 2.0% respectively), though +0.1ppts is added to the 2020 PCE forecast.
The evolution of the FOMC’s projections for 2018 are shown below: note the solid increase in growth and downward revisions to unemployment, yet PCE inflation projections remain unchanged (i.e. the flatness of the Phillips curve) and problematically for the USD, the median dot has not budged.
The Fed is growing clearly more optimistic in the growth outlook but the USD should continue to ease in coming days, hopes dashed increased confidence has not translated into a more aggressive reprofiling of the Fed’s projected rate path."
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