FOMC meeting : Economy slowed, but headwinds fade

David Page (pictured), senior economist at AXA Investment Managers, comments on April’s Federal Open Market Committee (FOMC) meeting.

April’s FOMC meeting left rates unchanged, although one member again dissented in favour of an immediate 0.25% hike. The accompanying statement acknowledged slower economic activity, but also an easing in headwinds from abroad.

However, there were few clues to the monetary outlook. These are only likely to emerge over the coming weeks with participants’ commentary and the minutes to this meeting.

We continue to expect a modest acceleration in economic activity to return the FOMC to considering tighter policy again. On balance, we forecast the FOMC to tighten policy again in July, one of two expected moves this year.

April’s FOMC meeting left the Fed Funds Rate unchanged at 0.25-0.50%. This was widely anticipated, not least following March’s minutes suggesting any change in April would suggest unwarranted urgency to tighten policy.

However, as in March, Kansas Fed President, George dissented from the Committee’s decision to leave policy on hold advocating an immediate 0.25% hike.

This meeting was without forecasts or press conference and additional communication was limited to the accompanying statement. The statement bore witness to softer economic activity – “activity appears to have slowed” – with the change reflecting household spending described as “moderated”.

However, the statement appeared to question the cause of this moderation saying “real income has risen at a solid rate and consumer sentiment remains high”. Housing was still perceived as having “improved further”, business investment and net exports were still described as “soft”.

However, the statement acknowledged the improvement in overseas markets and financial conditions relegating “global economic and financial developments” to being closely monitored, from still posing a risk.

In truth, the statement recorded little change to Fed thinking beyond acknowledging slower activity, which we expect to be confirmed with the release of today’s Q1 GDP, although we think it telling that the Fed also acknowledged fewer headwinds from overseas.

Initial market reaction was accordingly limited, 2-year yields inched 2bps higher to 0.86% and 10-year 1bp to 1.90%. The S&P dipped on the announcement but the dollar, despite volatility, was unchanged.

Yesterday’s statement tells us little about future policy. For sure, economic activity will have to quicken before the Fed considers further policy tightening. We expect this to emerge over the coming months.

Should this quickening continue to strengthen the labour market while ‘core’ inflation remains close to mandate consistent levels, we think the Fed will consider removing more stimulus and fulfilling its expectation of two hikes this year.

If such consideration does not result in a swift reversal of financial conditions, then we expect the Fed to tighten policy twice this year. On balance, this remains our central view and we forecast the next hike at July’s meeting.

We consider this unusual timing likely as the Committee chooses to avoid the heightened global uncertainty that might surround June’s UK EU referendum and the proximity of presidential elections that a move later in Q3 would entail.

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