U.S. Macro Flash
Comment on FOMC Decision: Accommodation Full Speed Ahead
The FOMC's announcement today that asset purchases will remain at $85 billion for
now was not our call. While we still believe that the start of tapering may be
resolved by year-end, the bar is higher than we thought and we can't rule out a
lengthier debate dragging into next year. The emphasis on maximum
accommodation extended to forward guidance on both QE and rates. Updated
economic and interest rate projections show the economy at or near full
employment in 2016, while expectations for the funds rate remain far below what
previous experience would anticipate.
The logic behind the Committee's hesitancy was laid out by the Chairman.
Policymakers were less confident that improvements in the economy and labor
markets would be sustained, despite much progress. They also expressed concern
about recent "rapid" tightening in financial conditions and want to see the response
to higher rates in housing and across economic activity. And, they were more
uncertain about the effects of fiscal restraint, highlighting the possibility that the
upcoming debate over government spending and debt authority enhances downside
risks.
On all counts, the Fed's points surprised us. Financial conditions are tighter but still
highly supportive with historically low interest rates. It is especially notable that the
policy statement echoed our own judgments about fiscal effects to date, namely that
"taking account of federal fiscal retrenchment, the Committee sees the improvement
in economic activity as consistent with growing underlying strength..." This view
suggests today's decision was a tough one and that tapering may still be a meeting
to meeting call, down to a small handful of data points, market developments and
safe passage through fiscal legislation. The last of these could prove the most
problematic for tapering this year.
The summary of economic projections underscored the view that policy would likely
remain very accommodative deep into recovery. The updated forecasts were well in
line with expectations that we outlined in the weekly. The median expectation is that
unemployment will be well within ranges most officials view as normal or consistent
with full employment by 2016. Rate forecasts anticipate a 1% funds rate in late-
2015 and 2% in 2016. Both would be about 150bps below what even relatively
dovish policy rules would prescribe. On initiating rate hikes, Bernanke indicated that
"fed funds rate increases might not occur until the jobless rate is considerably below
6.5%.” Message sent.
��
Comment on FOMC Decision: Accommodation Full Speed Ahead
The FOMC's announcement today that asset purchases will remain at $85 billion for
now was not our call. While we still believe that the start of tapering may be
resolved by year-end, the bar is higher than we thought and we can't rule out a
lengthier debate dragging into next year. The emphasis on maximum
accommodation extended to forward guidance on both QE and rates. Updated
economic and interest rate projections show the economy at or near full
employment in 2016, while expectations for the funds rate remain far below what
previous experience would anticipate.
The logic behind the Committee's hesitancy was laid out by the Chairman.
Policymakers were less confident that improvements in the economy and labor
markets would be sustained, despite much progress. They also expressed concern
about recent "rapid" tightening in financial conditions and want to see the response
to higher rates in housing and across economic activity. And, they were more
uncertain about the effects of fiscal restraint, highlighting the possibility that the
upcoming debate over government spending and debt authority enhances downside
risks.
On all counts, the Fed's points surprised us. Financial conditions are tighter but still
highly supportive with historically low interest rates. It is especially notable that the
policy statement echoed our own judgments about fiscal effects to date, namely that
"taking account of federal fiscal retrenchment, the Committee sees the improvement
in economic activity as consistent with growing underlying strength..." This view
suggests today's decision was a tough one and that tapering may still be a meeting
to meeting call, down to a small handful of data points, market developments and
safe passage through fiscal legislation. The last of these could prove the most
problematic for tapering this year.
The summary of economic projections underscored the view that policy would likely
remain very accommodative deep into recovery. The updated forecasts were well in
line with expectations that we outlined in the weekly. The median expectation is that
unemployment will be well within ranges most officials view as normal or consistent
with full employment by 2016. Rate forecasts anticipate a 1% funds rate in late-
2015 and 2% in 2016. Both would be about 150bps below what even relatively
dovish policy rules would prescribe. On initiating rate hikes, Bernanke indicated that
"fed funds rate increases might not occur until the jobless rate is considerably below
6.5%.” Message sent.
No comments:
Post a Comment