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Goldman: Muligt med fem FED-renteforhøjelser i år

Morten W. Langer

torsdag 22. februar 2018 kl. 8:38

Fra Zerohedge:

US FOMC: Further and further along

The January FOMC Minutes showed a Committee that is increasingly optimistic regarding the near-term outlook, and increasingly looks like it is leaning toward four hikes this year. The main takeaway from the Minutes in our view was an explanation of the addition of “further” in the January statement, which the Committee chalked up to an agreed-upon strengthening of the near-term outlook.

Furthermore, the Minutes showed that while the Committee still judges the risks to remain “roughly balanced”, “several” participants have suggested that upside risks to the near-term outlook may have increased. Paired with an increasingly more confident view that inflation will move back towards target, we see the January Minutes as supportive of our call for four rate hikes this year.

  • The January statement added “further” to “gradual increases in the federal funds rate” in its January statement. The Minutes provided an explanation: that the Committee chose to do so to reflect the “strengthening in the near-term economic outlook,” which “increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.”
  • In line with the Committee’s upgrade to its near-term economic outlook, “a number” of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data.”
  • While the Committee continues to judge the risks to the outlook as “roughly balanced”, the Minutes revealed that “several” participants “suggested that the upside risks to the near-term outlook for economic activity may have increased.”
  • Lastly, “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.”
  • “Almost all participants” anticipate that inflation will move up to target over the medium term. “A couple” noted that the step-up in pace of growth could pose upside risks.
  • The inflation doves remain though, with “some participants” seeing “an appreciable risk that inflation would continue to fall short of the Committee’s objective” and therefore judging that the Committee could remain patient.
  • “Several” participants noted that “imbalances in financial markets may begin to emerge as the economy continued to operate above potential.”
  • A general lack of wage growth was cited, as “participants generally noted few signs of a broad-based pickup in wage growth in available data.” The January meeting was before the release of the January employment report, which showed average hourly earnings to have moved up 0.75% over the past two months.
  • There was some discussion of the evolution of r*. Some participants noted that r* could “move up more than anticipated as the global economy strengthened,” but alternatively “might remain low in the absence of fundamental shifts in trends in productivity, demographics, or the demand for safe assets.”
  • Overall, we see the January FOMC Minutes as hawkish. With the upgrade to its near-term economic outlook and with “several” participants increasingly seeing risks as moving to the upside, it appears that the Committee is positioning itself to move to four hikes this year from three, which would still remain consistent with “further gradual increases in the federal funds rate.”
  • In terms of the 2018 rate dots for the March meeting, we think that the median rate “dot” will move up from its current projection of three hikes this year. It will likely be a close call, as it will take four of the current six dots at three hikes for 2018 to move up in order to move the median.
  • However, with the Minutes confirming our expectation that “further” implies a move toward four hikes, and with the Committee very likely to raise its median growth forecast for the year and more confident in its inflation forecast, if these participants do not shift their rate path at the March meeting, the question becomes what exactly are they waiting for?

    Below is the key excerpt transcribed from the just released Goldman podcast, highlights ours:

    Marina Grushin: Welcome to the Top of Mind podcast. I’m Marina Grushin. Inflation worries and rising rates were among several factors that jolted equity markets out of complacency earlier this month. Yet equities have largely looked through last week’s upside surprise in core CPI, which increased at the fastest pace in 12 years. Goldman Sachs economists see this as part of a rebound in inflation that will continue alongside quarterly Fed hikes. So how easily will risk assets digest these developments over the coming weeks and months?

    Joining us today to discuss the inflation path and the risks around it is David Mericle, Goldman Sachs senior US economist.

    David, thanks for joining us. You’ve been calling for a pickup in wage and price inflation for some time now, and the latest data have shown signs of reacceleration… but these numbers can be volatile. So what makes you think that inflation is now on a more sustainable upward trajectory?

    David Mericle: I was admittedly surprised by the soft inflation data last year, but I think it would be a mistake to make too much of it. Over the course of 2017, the market bought hard into the claim that inflation was just structurally lower for one reason or another, whether it was the alleged effect of globalization or of Amazon or whatever. We have been very skeptical of these stories, which, in my view never had a whole lot of evidence in their favor. And I think the weakness last year, in the end, was largely idiosyncratic and transitory and didn’t tell us anything profound or new about the inflation outlook.

    I do see the latest wage growth and inflation news as encouraging, but I think it would be equally wrong to get too carried away at this point in expecting a very rapid acceleration on the basis of a couple of prints. In a labor market that is likely to see historically low levels of unemployment in the coming years, both wage growth and inflation are likely to gradually move higher.

    But that’s just one part of our 2018 inflation forecast. On top of conventional Phillips Curve effects, we also expect boosts to core inflation from higher energy prices, from dollar depreciation, from the fading impact of the ACA on healthcare inflation and from the dropping out of some unusual downside base effects last year. Each of these should contribute a bit to pushing inflation closer to the target by the end of the year.

    Marina Grushin: And you’ve now upgraded your year-end core PCE forecast by 0.1pp to 1.9%. At this point, are the risks around that tilted to the upside or the downside?

    David Mericle: I think there are risks in both directions, though I would say that the risks to the upside were, at least until very recently, quite underappreciated in financial markets. Last year some unexpected weakness emerged in categories that just aren’t that cyclical. In recent research, we found that the historically cyclical categories of core inflation have largely picked up as expected, while the acyclical categories lagged last year. But the reality is that a pretty large share of the core consists of categories that largely follow sector-specific trends rather than broader cyclical trends, so I think those categories in particular always present risks in both directions.

    In thinking about upside risks, I think the key question is whether we should expect to see an inflection point as the labor market gets extremely tight. It’s a hard question to answer looking at the aggregate inflation data because we really only have two good historical examples of this—the late 1960s and the late 1990s—and they turned out very differently, and they both differ in important ways from the current situation. But if you look at city-level inflation and wage growth data in the US, you actually have a lot more examples. And looking at that data, we’ve found that there does seem to be a bit of a kink in the Phillips Curve at very low rates of unemployment—rates below 4%. So I think there is an upside risk to our forecast, and I think even now the market might not fully appreciate it.

    Marina Grushin: The concern with that upside risk, of course, is how it might influence the Fed. In your view, what would have to happen for the Fed to tighten policy more aggressively?

    David Mericle: We expect them to hike four times this year. They wrote down three hikes in their December dot plot, but that projection, in my view, already felt a bit dated at the time and not really in sync with their economic projections. It feels even more dated now that the fiscal stimulus has grown and the inflation and wage data have finally shown signs of life. So, let me consider our four hike scenario as the baseline here, and I would say that I see risks around our forecast as two-sided as well. I doubt that they would hike at a non-press conference meeting in the first half of this year; it just doesn’t seem necessary yet. But by later in the year, it’s certainly possible that they wind up adding another one and do five hikes for the year.

    I don’t see higher inflation as the most obvious catalyst for picking up the pace, at least not in 2018. I don’t think that core inflation is likely to be meaningfully above 2% by year-end, and even if it were moderately above, after so many years of below-target inflation, I don’t think Fed officials would be particularly anxious about being a bit above their target, which is symmetric after all. Instead I think signs of labor market overheating are more likely to create enough anxiety at the Fed that they feel the need to pick up the pace. If the unemployment rate falls to the level we expect—3.5% by end-2018—if the economy shows no signs of slowing down, and especially if they were to again seemingly fail to get traction over broader financial conditions, as occurred in 2017, then I think under those circumstances it would be very natural to consider acting more aggressively and picking up the pace.

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