The FOMC paved the way for another rate hike, likely at the June meeting according to market probabilities (42% at 7:15 p.m.). There were two expectations this evening. The first was to obtain more details on the balance of risks and the FOMC’s perception, which could define the gradual pace of rate hikes that has been mentioned for months. The second was to obtain the dot plot again, i.e., each board member’s expectations for rate hikes.
In its latest minutes, the Fed stated that it was monitoring economic developments and developments in financial markets. The main new development is that the Fed clearly stated that these developments « continue to pose risks. »
The US economy has improved moderately. The gains previously observed in the labor market (unemployment rate at 4.9%, net job creation, albeit concentrated in services, payroll up sharply – 242,000 in February), coupled with a rebound in inflation, have been reassuring. In addition, core CPI inflation – excluding food and energy – was published today at 2.3% (year-on-year) for February. This figure is therefore above the 2% target. However, the Fed is focusing its attention on the PCE index, which reached 1.3% in January. Furthermore, consumer spending remained up 2.9% in January, despite zero monthly change in retail sales in February, a consumer confidence index of 92.2 in February compared to 98 at the beginning of the year, and a slowdown in the Michigan index (91.7 compared to 93.3 in January). In particular, car sales remain strong (17.4 million annualized sales).
Tensions on the financial markets eased with the end of earnings revisions and massive sales in the high-yield bond market, supported by the recovery in oil prices (up 30% in a few weeks). In addition, the decline in the risk of recession in the United States over the next 12 months (20% according to the WSJ survey) contributed to a downward correction in financial stress indicators (relative contraction in CDS, particularly in the banking sector, and a decline in the implied volatility of equity indices). The Fed also stated that market inflation expectations remained too low despite a slight improvement. These expectations are also reflected in bond yield trends, with the US 10-year yield reaching a low of 1.66% in mid-February before recovering to 1.99% recently. The « Shadow » rate*, obtained by the Yu-Xia model based on futures rates, shows a slight but insufficient improvement in this indicator to raise the rate this evening.
On this basis, the FOMC will continue to monitor market developments. This approach is fairly similar to that seen in September 2015. The clear objective is to prepare and normalize expectations of Fed Fund rate hikes in the medium term.
Finally, the famous dot plot – which represents the expectations of each FOMC member regarding future rate hikes – has been updated, as agreed on a quarterly basis. The latest Macro Network consensus from BSI Economics anticipates 1 to 2 rate hikes in 2016 (52%). The Fed’s previous dot plot anticipated two to three rate hikes in 2016. The new dot plot shows a concentration of expectations, particularly in the 0.75-1.00% range, which accounts for more than 50% of expectations, whereas no range obtained a majority in December 2015. Revisions by the presidents of the Cleveland (Mester) and Kansas City (George) Fed banks were to be expected – in December, they anticipated 5 to 7 rate hikes – which remained excessive. On the other hand, the disappointment of the Chicago Fed in the Beige Book (Evans) on consumer spending left the door open for a « slightly hawkish » vote, which would have been in line with the intentions of Brainard, Tarullo, and Dudley (New York Fed) with two rate hikes in 2016. Yellen was able to revise her forecast – representative of the FOMC Board – downwards, anticipating rates of 0.75-1.00% at the end of 2016.
Anticipated rates at year-end:
0.50-0.75: 1 forecast in March 2016 vs. 0 in December 2015
0.75–1.00: 9 forecasts in March 2016 vs. 4 in December 2015
1.00–1.25: 3 expectations in March 2016 compared with 3 in December 2015
1.25–1.50: 4 expectations in March 2016 compared with 6 in December 2015
1.50–1.75: 0 expectations in March 2016 compared with 2 in December 2015
1.75–2.00: 0 expectations in March 2016 compared with 0 in December 2015
2.00–2.25: 0 expectations in March 2016 compared with 1 in December 2015
