Fed: Staying on track of policy normalization - ING

The Federal Reserve remains focused on withdrawing stimulus despite softer inflation and activity numbers, according to James Knightley, Chief International Economist at ING.

Key Quotes

“Given the Federal Reserve's commitment to “gradual increases” in the Fed funds rate and the fact it only hiked rates last month, today’s meeting should be a non-event in terms of action. Instead, attention will centre on how the Fed evaluates the recent data, with implications for the future pace of rate hikes and whether they offer clear hints about a September announcement on their balance sheet reduction programme.”

“Given the wide gulf between what the market anticipates from the Fed (barely one rate rise over the next 18 months) and the Fed’s forecast of four 25bp hikes, we suspect the Fed will retain a relatively upbeat tone and continue to assert that inflation will return to 2% “over the medium term”. Nonetheless, recent subdued inflation and ‘mixed’ activity numbers mean that December looks a more likely point for the next rate move, rather than September. We look for the September FOMC meeting to state that balance sheet reduction will start in October.”

“Looking further ahead, we still forecast two rate rises in 2018 with recent comments on asset price valuations (“somewhat rich” according to Janet Yellen and equities “running very much on fumes” according to San Francisco Fed President Williams) and loose financial conditions (fairly flat yield curve and dollar softness) suggesting Fed officials are broadening out their reasoning for tighter monetary policy. For the market though, they will need to see the data improve before they will be convinced.”