Fra BNP Paribas:
The August FOMC statement contained one major hawkish change, upgrading the pace of
economic activity to “strong” from “solid”.
In the same vein, the Committee also upgraded its assessment of household spending from having “picked up” to having “grown strongly”.
The August statement is clearly hawkish to us on balance and reinforces our expectations
for the Fed to deliver two more hikes this year and one next.
The FOMC made almost no changes to its statement in August, but the changes it did make
were clearly hawkish. The Committee upgraded its assessment of the rate of economic activity to “strong” from “solid”, in line with the outstanding pace of domestic demand in Q2 2018.
Additionally, the Committee upgraded its assessment of household spending to having “grown strongly” from having “picked up”, although we see this change as coincident with the broader upgrade to economic activity.
With the advance Q2 GDP report showing domestic demand rising by 4.3% q/q saar (its second highest print, aside from Q4 2017, since Q4 2014), we see the upgrade as an objective acknowledgement of an economy that currently appears to be firing on all cylinders.
Additionally, current Fed estimates of Q3 GDP are projecting another strong quarter for growth, with the New York Fed’s Nowcast at 2.8% q/q saar (right about what we have) and the Atlanta Fed’s GDPNow at a roaring 5.0% q/q saar. In addition, with President Trump commenting on Fed policy, we think the hawkish upgrade could form a sort of insurance policy to delivering hikes on a continued gradual pace.
While the Committee could have included a sentence that it would monitor international developments more closely, we think both political forces and developments on the trade front likely kept the FOMC at bay. Overall, the August statement came in line with our expectations for minimal changes given the substantial alterations that were made in June, but the changing of its assessment of economic activity to “strong” from “solid” left the statement with a hawkish bias.
In doing so, the FOMC further reinforced our expectations for it to continue to deliver a gradual pace of rate hikes, which we see coming in September, December and March, at which point we expect signs of a slowing economy to cause the Fed, having pushed rates to neutral levels, to pause its hiking cycle.
