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21 Mar 2016
Fed: Back to old habits? - ANZ
Research Team at ANZ, suggests that with the benefit of a couple more days and the fact that markets have settled somewhat, it is little easier now to reflect on the Fed’s decision and surprise dovishness last week.
Key Quotes
“Certainly, in what was a generally quiet session for data on Friday, there was the odd news story of analysts highlighting confusion at the Fed’s “new” approach. And perhaps that confusion is justified. The Fed has long told us that the pace of tightening would be data dependent. Yet when you consider that since its hike in December – where the dot plots also projected another four hikes this year – inflation (measured by the CPI or PCE deflator) is higher, as are both oil prices and inflation expectations (based on market break-evens or surveyed measures such as Friday’s Michigan measure), the unemployment rate is lower (4.9% versus 5.0%), and so is the USD.
Viewed in isolation, one could argue that the above factors should have seen the Fed actually project more hikes this year not less, or at least a number on par with what was projected in December. So the fact its dot-plots now show two fewer hikes means that something else is clearly on FOMC members’ minds. That thing is no doubt the global backdrop, and it is a concern certainly not unique to the Fed.
Many other central banks have highlighted global economic concerns recently too (including the RBNZ of course). We share concerns also. That being so, removing two full hikes from the baseline projections is still a significant move at a time the US economy still looks in pretty good shape. Of course it could be a move that is fully justified if global economic conditions do continue to deteriorate. But one still has to wonder if the Fed is reverting back into old habits of providing markets with additional stimulus every time they throw a tantrum.”
Key Quotes
“Certainly, in what was a generally quiet session for data on Friday, there was the odd news story of analysts highlighting confusion at the Fed’s “new” approach. And perhaps that confusion is justified. The Fed has long told us that the pace of tightening would be data dependent. Yet when you consider that since its hike in December – where the dot plots also projected another four hikes this year – inflation (measured by the CPI or PCE deflator) is higher, as are both oil prices and inflation expectations (based on market break-evens or surveyed measures such as Friday’s Michigan measure), the unemployment rate is lower (4.9% versus 5.0%), and so is the USD.
Viewed in isolation, one could argue that the above factors should have seen the Fed actually project more hikes this year not less, or at least a number on par with what was projected in December. So the fact its dot-plots now show two fewer hikes means that something else is clearly on FOMC members’ minds. That thing is no doubt the global backdrop, and it is a concern certainly not unique to the Fed.
Many other central banks have highlighted global economic concerns recently too (including the RBNZ of course). We share concerns also. That being so, removing two full hikes from the baseline projections is still a significant move at a time the US economy still looks in pretty good shape. Of course it could be a move that is fully justified if global economic conditions do continue to deteriorate. But one still has to wonder if the Fed is reverting back into old habits of providing markets with additional stimulus every time they throw a tantrum.”