US: Fed’s presents Goldilocks outlook

Viraj Patel, Research Analyst at ING, points out that the FOMC unanimously decided to raise the Fed funds rate by 25bps which signalled a fairly Goldilocks outlook for the US economy - that is one of stronger economic growth in the near-term, contained inflation and gradual rate increases.

Key Quotes

“We noted 3 interesting takeaways from Fed’s latest projections: (1) the committee is evenly split between 3 and 4 rate hikes in 2018 – meaning that even if the dial has tilted slightly towards the latter, getting a consensus within the FOMC (and the reality of 4 hikes) is still a distant of prospect and highly dependent on evolving macro data; (2) the Fed’s symmetric inflation mandate – and tolerance for slightly above-target inflation – is now formally noted in the 2019 core PCE inflation median estimate at 2.1%; and (3) the forecasts do not incorporate any downside risks stemming from US trade policy – which lends itself to a somewhat rosier outlook than what may actually prevail and may cause investors to discount the Fed’s signalled policy path.”

“While these Fed signals may have kept the ‘Goldilocks’ sentiment in place for now, we note that there is still a ‘Big Bad Wolf’ – in the form of a global trade war – lurking around the corner for markets. Indeed, the attention now shifts to Washington – with President Trump set to announce tariffs on Chinese imports by invoking Section 301 (reports suggesting around $50bn tariffs).”

“Under a ‘Cold Trade War’ scenario – and in the absence of an escalation of a broadening of US tariffs to other sectors and countries – we think tit-for-tat protectionist measures is unlikely to materially dent global risk sentiment, giving rise to what we label as a ‘nervous Goldilocks’ environment.”

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