FXStreet (Delhi) – Richard Franulovich, Research Analyst at Westpac, notes that the US Fed finally initiated lift-off, raising the target range for Fed Funds by 0.25% to 0.25% to 0.50%.
Key Quotes
“Reflects the somewhat ‘dovish tilt” to the statement’s forward guidance where “gradualism” is stressed, Chair Yellen’s reference to the “pre-emptive” nature of today’s move, the observation that we have a “significant shortfall” on inflation, as well as the dot plot interest rate projections, which were trimmed.
The 2016 median was unchanged (four hikes) and the terminal Fed Funds rate was also left steady at 3.5% too, after steadily being cut for a while. Lift-off was unanimous too.
Activity is seen expanding “moderately”, as it has for a while. The labour market and inflation commentary head in opposite directions. The Fed seems to have upgraded their assessment of the labour market now that underutilisation of labour resources is seen to have diminished “appreciably” but on the inflation front the Fed notes longer-term inflation expectations have “edged down” vs “remained stable”.
The median for 2016 growth was upgraded a fraction from 2.3% to 2.4%, while 2017 through to the long run were unchanged. The unemployment rate saw the obligatory downward revisions to 4.7% in 2016 and 2017, from 5% and 4.8% respectively. The PCE inflation forecast for 2016 was trimmed 0.1ppt to 1.6%, otherwise they are unchanged.
The median “dot” in 2016 is unchanged, four hike expected taking Fed Funds to 1.375% but dot plot median for 2017 has been trimmed 25bp, that year now implying four hikes instead of five. The median terminal rate in the dot plot interest rate projections was unchanged at 3.5%, the first time it has not been cut for sometime. This arguably on the hawkish side of what was expected.
Chair Yellen stressed data dependence and gradualism in her press conference and that the peak for rates will be lower than past cycles, checking all the usual dovish boxes. The Fed also announced that the Fed will retain its current large balance sheet until policy normalisation is “well underway”.
A follow-up Fed hike could come as soon as March, substantially sooner than discounted (2016Q3), aided and abetted by favourable oil price base-effects that will lift inflation almost a percentage point and a potentially mild-winter if long range forecasts are to be believed, flattering Q1 growth. A stumble into year’s end and early next year should give way to a resumption of the USD’s longer term uptrend as 2016Q1 progresses.”
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