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US: Fed expected to remain in holding pattern; February inflation to cool FOMC hawks and doves are both likely to be in a holding pattern at the March meeting, as they wait for the data and market fog to lift.

Tuesday’s retail sales report should not push them any closer to action, with downward revisions and a disappointing February for control-group sales suggesting that Q1 spending is tracking lower than we previously expected (see Consumer spending sours for more).

With spending still rising at a “moderate rate,” the Wednesday FOMC statement is likely to leave the spending assessment unchanged. We do expect the statement to acknowledge weaker investment, tighter labour markets and perhaps higher inflation. But overall, the central macro projections should be little changed.

We expect the median of the dot plot, however, to show one less hike this year, but still indicate a bias to hike in June 2016, data willing. Overall, the message from the Fed is likely to be a pause to assess uncertainties and gather more evidence, but no shift in strategy, or medium term view: Act soft, talk tough.

After the strongest core CPI print since May 2006 in January (0.29% m/m), we expect a more subdued 0.14% m/m rise in February, below the Bloomberg consensus expectation (0.2% m/m). Our core forecast would leave the year-on-year rate unchanged at 2.2%. Since volatile components such as lodging away from home, airfares, and apparel all contributed to the upside surprise last month, we do not expect the momentum to persist.

We expect a February NSA CPI print of 236.903 and a 0.3% m/m decline in seasonally adjusted headline prices that mainly reflects a 9.3% m/m projected drop in motor fuel prices (nsa). Beyond February, we expect gains in core CPI to average 0.17% m/m, implying annual average core CPI inflation of 2.1% in both 2016 and 2017. For more detail, see: US Inflation Watch: A suspiciously strong core.

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