Fra BNP Paribas:
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?
