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20 Mar 2014
Fed on the highway to hikes - Westpac
FXStreet (Barcelona) - Sean Callow, Senior Currency Strategist at Westpac comments that even the seemingly best-flagged FOMC meetings still hold the potential for a sharp market reaction.
Key Quotes
“In some cases this reflects lopsided positioning more than any notable unexpected change in policy stance. The $10bn reduction in QE to $55bn per month was exactly as expected for many weeks in advance. Dropping the 6.5% unemployment benchmark was also widely expected, given that the participation rate has fallen steadily since 2008, reducing the usefulness of focusing on the headline jobless rate.”
“The new guidance includes a commitment to “highly accommodative” policy for now and a Bank of England- style expectation that “even after employment and inflation are near mandate-consistent levels”, the fed funds rate is likely to be kept “below levels the Committee views as normal in the longer run.”
“None of this should have been too surprising. The FOMC seems firmly on track to wrap up QE this year but the data flow has not encouraged any indication of faster ‘tapering’, aside from the usual squawks from the hawks. Fed Chair Yellen conceded that the FOMC probably “over-did” optimism on the economy at the January meeting while the statement noted that the winter economic slowdown was only “in part” due to unusually harsh weather.”
“The downward revisions to market expectations for Q1 14 GDP (consensus is now 1.9%) had to skew FOMC forecasts lower versus the last update, in Dec. As the chart across shows, the FOMC still expects 2014 to be a much stronger year for growth than 2013’s sluggish 1.9% expansion but it its optimism over 2014 and 2015 has waned over time.”
Key Quotes
“In some cases this reflects lopsided positioning more than any notable unexpected change in policy stance. The $10bn reduction in QE to $55bn per month was exactly as expected for many weeks in advance. Dropping the 6.5% unemployment benchmark was also widely expected, given that the participation rate has fallen steadily since 2008, reducing the usefulness of focusing on the headline jobless rate.”
“The new guidance includes a commitment to “highly accommodative” policy for now and a Bank of England- style expectation that “even after employment and inflation are near mandate-consistent levels”, the fed funds rate is likely to be kept “below levels the Committee views as normal in the longer run.”
“None of this should have been too surprising. The FOMC seems firmly on track to wrap up QE this year but the data flow has not encouraged any indication of faster ‘tapering’, aside from the usual squawks from the hawks. Fed Chair Yellen conceded that the FOMC probably “over-did” optimism on the economy at the January meeting while the statement noted that the winter economic slowdown was only “in part” due to unusually harsh weather.”
“The downward revisions to market expectations for Q1 14 GDP (consensus is now 1.9%) had to skew FOMC forecasts lower versus the last update, in Dec. As the chart across shows, the FOMC still expects 2014 to be a much stronger year for growth than 2013’s sluggish 1.9% expansion but it its optimism over 2014 and 2015 has waned over time.”