FOMC latest protections are goo aggressive – Wells Fargo

FXStreet (Córdoba) – Analysts from Wells Fargo noted that currently there is a divergence between the FOMC and markets expectations. According to them the latest FOMC projections are too aggressive.

Key Quotes:

“In the dot plot published following the December FOMC meeting, the median participant indicated four fed funds rate hikes during 2016 followed by another four hikes during 2017. Given recent financial market developments, futures are currently pricing in only one rate hike for 2016. We will not receive updated FOMC projections until the March meeting, but we believe that their latest projections are too aggressive.”

“That said, we believe our forecast for the funds rate will roughly balance the risks in the eyes of the FOMC. To the downside, which is what financial markets seem to be weighing more heavily than the FOMC and our own forecasts, there are the risks that lower commodities prices, financial market volatility and/or a slowdown in global growth destabilize the U.S. economy and force the Fed to backpedal. In addition, the Fed’s concern with credibility could slow its tightening further if longer-term inflation expectations remain depressed.”

“On the flip side, there is the risk that inflation will outpace what many expect, leading the Fed to tighten faster than our forecast. Any stabilization in energy prices, let alone a rebound, would support the headline figure. Core inflation should also continue to firm. Tightening in the labor market is already supporting wages and the disinflationary effects from healthcare on the core PCE should lessen.

“The Fed has also acknowledged the lags and imprecision of monetary policy. That is, trying to “fine-tune” the unemployment rate toward full employment once it has fallen below full employment is a risky proposition. By tightening sooner, the Fed hopes to avoid overheating the labor market to prevent a significant overshoot of inflation. We believe the Fed will view these risks as largely offsetting with the path of tightening that we forecast.”

Analysts from Wells Fargo noted that currently there is a divergence between the FOMC and markets expectations. According to them the latest FOMC projections are too aggressive.

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