News: The Fed minutes published this evening delivered a report, as anticipated, ahead of the update to the economic and financial forecasts for the June 15 conference.
US economic activity has picked up in recent weeks thanks to private consumption. Retail sales are robust (+3% year-on-year), while consumer confidence rose 5 points in April for the Michigan indicator and 4 points for the Conference Board indicator. Overall, leading indicators of activity remain in positive territory (52.4 for the composite, 52.8 for services). The industrial PMI, which represents 20% of value added and 12% of jobs, remains at 50.8. GDP growth in 2016 is expected to be 2.2% (a rate made possible by the Atlanta Fed’s forecast of 2.8% for the second quarter) and core inflation 1.7% (core PCE at 1.6% in March).
Recent developments have shown that financial developments have become less of a concern than in March. Debates about a hard landing in China have shifted towards a soft landing, while oil prices have risen above $46 per barrel, reducing deflationary pressures from the energy component on an annual basis.
The median projection for the Fed Funds rate at 0.75-1.00% at the end of 2016 has not been updated. Ninety-four percent of FOMC members expect at least two rate hikes in 2016. This is also the case for 90% of the 10 voting members. The issue concerns the gradual nature of the rate hikes in increments of 25 basis points. Of the five remaining meetings in 2016 (June, July, September, November, December), only three will include an update of the economic outlook (June, September, December). Rate hikes will therefore occur on one of these three dates. Analysts estimate the probability of a rate hike on these three dates at 12%, 38% and 40% respectively. This market pricing, which is below the expectations of Fed members themselves, is one of the main sources of uncertainty about the pace of future rate hikes.
Rosengren, a voting member of the FOMC, emphasized this famous market mispricing this week, while non-voting members (Lockhart, Williams) continued to insist on at least two hikes this year, putting pressure on the Fed to act by September at the latest.
The meetings of the BoE (Bank of England), BoJ (Bank of Japan), and SNB (Swiss National Bank) will take place on June 16, the following day. This sequence of events will precede, by one week, an equally crucial factor in determining market volatility: the Brexit referendum on June 23 and the Spanish elections on June 26. These five events will fuel uncertainty and justify a further rate hike in September rather than June.
This is on the condition that the Fed is not as dependent on macroeconomic data as its members claim. Core CPI inflation is at 2.1%, core PCE is at 1.6%, unemployment is at 5%, JOLTS are up 3.9% and retail sales are up 3%. Five data-dependent reasons not to wait until September. However, the Fed’s gradual approach is designed to avoid destabilizing the markets, which would further weigh on the June calendar constraint, despite a resumption of price increases and a healthy labor market.
Reminder of the March dot plot and interpretation by voting members:
0.50–0.75: Brainard (vote)
0.75–1.00: Lockhart, Tarullo (vote), Evans, Fischer (vote), Bullard (vote), Dudley (vote), Yellen (vote), Rosengren (vote), Kaplan
1.00–1.25: Harker, Mester (vote), Williams
1.25–1.50: Kashkari, George (vote), Powell (vote), Lacker
