20 Mar 2015
Won't be long until FOMC reassesses views - Capital Economics
FXStreet (Bali) - Capital Economics assesses the impact of Fed policy on the markets, noting that it won’t be long before US wage inflation picks up, prompting policymakers to reassess their downgraded FOMC views.
Key Quotes
"Downward revisions to FOMC participants’ projections for the federal funds rate have triggered a significant rally in Treasuries and taken some heat out of the dollar. But our expectation is that the Committee will raise the rate over the next few years more rapidly than policymakers, investors and the consensus of economists envisage. The upshot is that we forecast a rebound in bond yields and renewed strength in the US currency. Equities may struggle, but mainly for a different reason."
"The big surprise was not the alteration to the language of the FOMC’s statement, but the revisions to policymakers’ projections for the federal funds rate – the median end-year figures for 2015, 2016 and 2017 were all lowered significantly."
"These revisions seem to be tied mainly to a belief that the labour market can continue to strengthen without triggering inflation (although they may also reflect some concern about the recent moderation of economic growth and the strong dollar)."
"Our view, though, is that it won’t be long before wage inflation picks up, prompting policymakers to reassess their views. So while we have lowered our end-2015 forecast for the federal funds rate by 25bp to a range of 0.75-1.00%, we have maintained our end-2016 forecast of a range of 2.75-3.00%."
"Although that rate would still be very low and do little to derail the economic recovery, it is a much more hawkish forecast than the median end-2016 projection of FOMC participants, which is a percentage point less."
Key Quotes
"Downward revisions to FOMC participants’ projections for the federal funds rate have triggered a significant rally in Treasuries and taken some heat out of the dollar. But our expectation is that the Committee will raise the rate over the next few years more rapidly than policymakers, investors and the consensus of economists envisage. The upshot is that we forecast a rebound in bond yields and renewed strength in the US currency. Equities may struggle, but mainly for a different reason."
"The big surprise was not the alteration to the language of the FOMC’s statement, but the revisions to policymakers’ projections for the federal funds rate – the median end-year figures for 2015, 2016 and 2017 were all lowered significantly."
"These revisions seem to be tied mainly to a belief that the labour market can continue to strengthen without triggering inflation (although they may also reflect some concern about the recent moderation of economic growth and the strong dollar)."
"Our view, though, is that it won’t be long before wage inflation picks up, prompting policymakers to reassess their views. So while we have lowered our end-2015 forecast for the federal funds rate by 25bp to a range of 0.75-1.00%, we have maintained our end-2016 forecast of a range of 2.75-3.00%."
"Although that rate would still be very low and do little to derail the economic recovery, it is a much more hawkish forecast than the median end-2016 projection of FOMC participants, which is a percentage point less."