US: Headwinds slowing the economy in H1 16 have eased - BBH

In view of the analysts at BBH, there is a broad consensus around the macroeconomic picture as the headwinds slowing the US economy in H1 16 have eased, and above trend growth in H2 16 appears to be carrying into 2017.  

Key Quotes

“Q4 16 GDP is expected to be revised to 2.1% up from 1.8%.  Many economists appear to accept that a good part, though not all, of the decline in the estimated trend growth in the US, is a function of demographic considerations.”

“Price pressures are gradually increasing.  Although the Fed's preferred and targeted measure of inflation (the core PCE deflator) is likely to have remained at 1.7% in January, the base effect warns of topside risk in the coming months.  Meanwhile, the labor market continues to improve.  The four-week moving average of weekly jobless claims fell to a new cyclical low the same week the BLS conducted the survey for non-farm payrolls, which will be released on March 10.”

“The Federal Reserve raised rates once in 2015 and once in 2016.  This year will be different.  The shift in opinion is not so much in the increase of the likelihood of a March increase or June increase, but in a move in May.  As we have noted, the advantage May is that it would be part of the normalization process when every meeting must be live.  Up until now, there was a general recognition that Fed action would take place at the quarterly meeting that had the economic forecast updates and was followed by a press conference.”

“That was good and arguably necessary.  However, this may no longer be the case.  As the pace of removing accommodation increases, the Fed needs greater flexibility.  The minutes of the January FOMC meeting showed that the Fed would tweak the dot plot communication tool by including fan lines of confidence.  As we have argued before, the Fed ought to consider a press conference after every meeting, like many others, including the BOE, ECB, and BOJ, and that would kill two birds with one stone, so to speak.  Communication would be enhanced, and the Fed would double the number of actionable meetings.  Alternatively, the Fed could scramble and put together an ad hoc press conference, but there are risks of leaks and fails to take advantage of the opportunity to evolve the Fed's communication and transparency.”