Fed policy is still likely to feature strongly as an influence in coming months - Rabobank
|"Federal Reserve Chair Yellen yesterday referred to the recent moderation in US inflation as a “mystery”. The lack of a clear correlation between falling unemployment rates and wage inflation is something that has triggered a lot of head-scratching by economists throughout the G10," analysts at Rabobank explained in a recent report.
Key quotes:
"The Fed responded to this yesterday by revising down its expectation for its preferred measure of inflation in its new economic projections released last night. The median forecast for core PCE was lowered to 1.5% in 2017 from a previous 1.7% and to 1.9% for 2018 from 2%. That said, the lack of price pressures was insufficient for the Fed to change its interest rate projections for 2017 and 2018. The dot plot shows that the FOMC is still aiming for a third hike before the end of this year, and three more in 2018. The three hikes that were projected for 2019 in the June projections, are now spread across 2019 (the first two) and 2020 (the third). The FOMC noted that past experience suggests that the recent weather events are unlikely to materially alter the course of the economy over the medium term, and they could boost inflation temporarily because of higher prices of gasoline and some other items. As expected, the Fed also announced the start of its balance sheet normalisation process."
"The confirmation that the Fed is still on course for a rate rise this year was interpreted as hawkish by the market and provided a boost for both US treasury yields and the US dollar. Arguably the greenback was on course for a rebound given the build-up of short positions this year. Although much of the souring in the tone of the USD in recent months has been a consequence of domestic political disappointments, Fed policy is still likely to feature strongly as an influence in the coming months. Despite the Fed’s guidance yesterday, we remain sceptical about the prospects of another rate rise by the end of the year. Not only is inflation proving to be stubbornly low, but Fed Vice Chairman Fischer (who retires next month) will not be voting in forthcoming policy meetings. This reduces the chances of a hawkish outcome."
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