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17 Dec 2015
What to make out from the FOMC statement and Yellen’s press conference – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, notes that as expected the FOMC made reference to the risk for the outlook for economic activity and the labour market as now being 'balanced', a change in rhetoric from the previous statement of 'nearly balanced'.
Key Quotes
“Much of the focus was on how the Fed was to determine the timing and size of future adjustments, although the statement continued to emphasize that 'the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate' before then emphasizing the dependence on incoming data. It was also noted that the Fed expects to maintain the current size of its balance sheet 'until normalization of the level of the federal funds rate is well under way'.”
“As was largely expected there weren't particularly big changes to the Fed's median forecasts relative to their September projections for real GDP growth, unemployment and inflation. 2016 GDP growth was revised up one-tenth (to 2.4%), while the 2017 and 2018 forecasts were left unchanged at 2.2% and 2.0%. The unemployment rate is expected to decline to 4.7% for the next three years, which is down from the previous 4.8% forecast. Meanwhile the core PCE inflation rate was revised down one-tenth for this year and next (to 1.3% and 1.6% respectively) but left unchanged for 2017 and 2018, the latter being the year when the Fed expects to hit its 2% target.”
“It was the revised dot plot projections that was most anticipated. While there had been some suggestion that the 2016 median dot could decline, it was kept unchanged at 1.375% or the equivalent of four 25bps hikes although it was noted that the central tendency range was revised lower. The 2017 median dot was nudged down 25bps to 2.375% while the 2018 median dot was down 12.5bps to 3.25%. The longer-term neutral rate was left unchanged at 3.5%. So while the path of the dots were tinkered with, it still concluded with the same terminal rate.”
“In the post-meeting press conference Yellen said that the decision 'reflects our confidence in the US economy' and that 'we see an economy that is on the path of sustainable improvement'. She highlighted that while developments abroad still pose a risk, these 'appear to have lessened since last summer'. Yellen also argued once again that the softness in inflation is transitory and that a delay in policy normalization would have meant policy would need to be tightened abruptly later.”
“In our view then it had a little for everyone and its hard to say with any conviction whether it favored the hawks or the doves more. With just two hikes priced in by the market next year, it's likely there'll be some disappointment from the doves that there was no change to the median 2016 dot. Then again some will be excited by the cuts to the 2017 and 2018 projections. The macro forecasts were a bit of a wash, if anything the most notable takeaway being a small downgrade to 2016 inflation. Meanwhile Fed Chair Yellen offered nothing particularly new, emphasizing moves will be gradual while also keeping her options open. We still don't think the Fed will get anywhere close to the dots but that due to our late cycle view.”
Key Quotes
“Much of the focus was on how the Fed was to determine the timing and size of future adjustments, although the statement continued to emphasize that 'the committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate' before then emphasizing the dependence on incoming data. It was also noted that the Fed expects to maintain the current size of its balance sheet 'until normalization of the level of the federal funds rate is well under way'.”
“As was largely expected there weren't particularly big changes to the Fed's median forecasts relative to their September projections for real GDP growth, unemployment and inflation. 2016 GDP growth was revised up one-tenth (to 2.4%), while the 2017 and 2018 forecasts were left unchanged at 2.2% and 2.0%. The unemployment rate is expected to decline to 4.7% for the next three years, which is down from the previous 4.8% forecast. Meanwhile the core PCE inflation rate was revised down one-tenth for this year and next (to 1.3% and 1.6% respectively) but left unchanged for 2017 and 2018, the latter being the year when the Fed expects to hit its 2% target.”
“It was the revised dot plot projections that was most anticipated. While there had been some suggestion that the 2016 median dot could decline, it was kept unchanged at 1.375% or the equivalent of four 25bps hikes although it was noted that the central tendency range was revised lower. The 2017 median dot was nudged down 25bps to 2.375% while the 2018 median dot was down 12.5bps to 3.25%. The longer-term neutral rate was left unchanged at 3.5%. So while the path of the dots were tinkered with, it still concluded with the same terminal rate.”
“In the post-meeting press conference Yellen said that the decision 'reflects our confidence in the US economy' and that 'we see an economy that is on the path of sustainable improvement'. She highlighted that while developments abroad still pose a risk, these 'appear to have lessened since last summer'. Yellen also argued once again that the softness in inflation is transitory and that a delay in policy normalization would have meant policy would need to be tightened abruptly later.”
“In our view then it had a little for everyone and its hard to say with any conviction whether it favored the hawks or the doves more. With just two hikes priced in by the market next year, it's likely there'll be some disappointment from the doves that there was no change to the median 2016 dot. Then again some will be excited by the cuts to the 2017 and 2018 projections. The macro forecasts were a bit of a wash, if anything the most notable takeaway being a small downgrade to 2016 inflation. Meanwhile Fed Chair Yellen offered nothing particularly new, emphasizing moves will be gradual while also keeping her options open. We still don't think the Fed will get anywhere close to the dots but that due to our late cycle view.”