FXStreet (Barcelona) – Previewing the key June FOMC Meeting, the Brown Brothers Harriman Team shares their observation on the rate hike scenario and that the three members – Yellen, Fischer and Dudley should be watched for any policy signal.
Key Quotes
“The FOMC meeting is the most important economic event this week. The implications are much broader than just the impact on the US dollar, which has surprisingly not reacted to the recent string of strong economic data. This month’s FOMC meeting had previously been widely seen as a likely time for the first rate hike. The unexpected weakness in GDP and the well-below trend job growth in March helped shift sentiment to September. This month’s Wall Street Journal survey showed 72% of economists now expect that.”
“What follows from this is that neither the FOMC nor Yellen at her press conference will indicate otherwise. To do this, the Fed will have to recognize what will eventually appear as stagnation in Q1 appears to be proving temporary as it had anticipated. This will likely mean a reduction of the “central tendency” of Fed forecasts, by which a few highs and lows are dismissed, and an average taken of the remainder. In March, it was 2.3-2.7% (2.5% midpoint, which after the recently updated forecasts is precisely what the IMF forecasts).”
“Tactically, it would be best for the Federal Reserve to avoid being in a position to cut its growth forecasts again in September. It would not be helpful in the context of both the IMF and World Bank recent assessments that the Fed should wait until next year to raise rates. On the other hand, a central tendency of below 2% might be taken as a signal that the doves are prevailing.”
“We have argued that the key policy signals emanate from three members: Yellen, Fischer, and Dudley. It follows from this that the FOMC statement, crafted by the Fed’s leadership, is the single best source of insight into the Fed’s thinking. It means that the dot plots are noisy, as are the minutes.”
“Yellen’s press conference comes in close second as she candidly explains how the FOMC statement should be read. Where Steil is correct, however, is that a dissent from a Governor is more significant than from a regional Fed President. There have been no dissents at this year’s first three meetings. This is unusual, and is likely to change, if not this week, in Q3. Forging a consensus for action is difficult. The hawks want lift off sooner and the doves later.”
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