FOMC participants to increase their growth forecasts – Nomura

Analysts at Nomura point out that two and half weeks ago, in his first Congressional Testimony as Federal Reserve Chair, Jerome Powell said very clearly that his “outlook for the economy has strengthened since December.” Governor Brainard picked up the same theme a week later.

Key Quotes

“This improved outlook should set the terms for the debate at next week’s FOMC meeting. It seems almost certain the FOMC will raise its targets for short-term interest rates again at the 20-21 March meeting. What is more important for markets, in our view, are the expected changes to the FOMC’s forecasts for the economy and the trajectory of policy.”

“The most important factor driving the change in the outlook is the passage of the Bipartisan Budget Act of 2018 (BBA) on 9 February. This two-year spending deal is expected to increase government spending by about 0.8% of GDP and the ramp-up in spending is relatively quick. This should have a significant impact on growth this year and in the first half of next year.”

“At this point, we expect FOMC participants to increase their growth forecasts for this year and next. We think the relatively rapid ramp-up in spending suggests the change in the growth outlook will be concentrated in 2018. Stronger growth should mean a lower path for the unemployment rate. Beyond these changes in the economic projections, the focus will likely be on changes to the appropriate path for policy.”

“Based on recent remarks by FOMC participants, we think the dots distribution will shift up across the forecast horizon. We believe more likely than not the median forecast for 2018 will imply a shift from three hikes this year to four, but this remains a very close call. However, we do not expect the median of the longer-run dots to change from the current level of 2.75% although upward adjustments to some dots are possible.”

“Beyond the FOMC statement and new forecasts, we expect Chair Powell’s comments in the press conference to broadly follow the points he made at his recent Congressional testimony. He will likely link the improved outlook to a range of factors – resilient economic data, supportive financial conditions, strong foreign growth and changes in fiscal policy – and stress that “gradual” interest rate increases are appropriate given the improved outlook. We also expect Chair Powell to stress that the FOMC’s inflation target is “symmetric”. Note that our forecasts are for PCE price inflation to reach a 2% y-o-y pace as early as the second quarter this year.”