FOMC review: largely in line with our expectations - Nomura

Analysts at Nomura explained that today’s FOMC meeting was largely in line with our expectations. 

Key Quotes:

"We continue to expect a total of four hikes in 2018, including two more after today’s hike, and two additional hikes in 2019. For today, as we expected, the FOMC raised the federal funds rate target by 25bp to 1.75-2%. In addition, the new policy rate path implied by the median “dot” in the Summary of Economic Projections (SEP) now implies four hikes in 2018, up from three previously, consistent with our expectations for this year. The new SEP implies two additional hikes in 2018, in September in December, three in 2019, and one in 2020, bringing forward one hike from 2020 to earlier years. With more upbeat economic and unemployment outlooks along with Chair Powell’s positive assessment of the economy, strength in economic activities appears to have led to a slightly faster pace of monetary tightening being embedded in the SEP.

During the press conference Chair Powell said that the Committee will move to having a press conference after every FOMC meeting, as opposed to every other meeting, starting in January 2019. He noted that the Committee will continue to issue updated economic projections only once per quarter. While the new press conference schedule does not signal a change in the Committee’s views on monetary policy, we believe it does indicate that the Committee could make adjustments to the target range of the federal funds rate at any meeting, not just those where economic forecasts are issued. Finally, as we expected, the Committee raised the IOER only 20bp to realign the EFFR with the top of the target range. 

Headline PPI rose 0.5% m-o-m in May, higher than market expectations (Consensus: 0.3%). However, most of the increase was attributable to volatile components such as energy (+4.6%) and trade services (+0.9%). Excluding food, energy and trade services, "core" PPI showed a moderate increase of 0.1% (Consensus: 0.2%). A 0.7% m-o-m decline in hospital services prices seems negative to core PCE inflation in May. Hospital services prices have increased strongly since late last year, pushing up core PCE inflation. However, the decline in the May PPI data suggests that some of the large increases in prior months have been reversed. 

Overall, we estimate that the contribution from the detailed components of PPI to core PCE m-o-m inflation is essentially zero (-0.4bp unrounded), down from +2bp. Taking into account CPI and PPI data, we now expect the core PCE price index to increase by +0.165% m-o-m in May, which translates into a y-o-y increase of 1.9% (1.897%), up 0.1pp from 1.8% (1.803%) in the previous month."

GDP tracking update: 

"Relevant PPI deflators for capital equipment, residential investment and inventories were all somewhat stronger than expected, implying less real equipment, residential and inventory investment in Q2. However, our slightly lower estimate of PCE inflation in May implies more real consumer expenditure growth in Q2. Altogether, we lowered our Q2 real GDP tracking estimate 0.1pp to 4.1% q-o-q saar."