25 Apr 2016
Fed: Likely to keep options open and not commit to a June move - BBH
Research Team at BBH, suggests that the recent FOMC statements have increasingly (confirmed by word count) put more weight on global developments.
Key Quotes
“The Fed will likely recognize the improvement in the global climate, but must acknowledge the soft patch that US growth has hit.
Trend growth in the US is estimated to be near 2%. The US economy grew 1.4% at an annualized pace in Q4 15 (the initial estimate was 0.7%). The day after the FOMC meeting concludes, the first estimate of Q1 16 GDP will be released. The median of the Bloomberg survey is 0.6%, which incidentally is also the rough midpoint of the Atlanta Fed GDPNow tracker (0.3% as of April 19) and the newly unveiled NY Fed GDP tracker (0.8% as of April 15).
Fed officials will look through the vagaries of the quarterly movement in GDP. Their confidence that the economy will return to trend growth and that its inflation target will be reached is based on the continued strength of the labor market. This is still the case.
The closest thing to a real-time reading of the labor market is the weekly initial jobless claims. Last week, which is the period of the survey for the national report, weekly initial jobless claims fell to new cyclical lows. It is now at a level not seen since 1973. Continuing claims fell to their lowest level since November 2000.
The June Fed funds futures contract implies almost a 1 in 4 chance of a hike while a Wall Street Journal survey earlier in the month found 75% of economists expect the second hike in June. It is in the Fed's interest to keep its options open and not commit to a June move. The Fed's may upgrade its global assessment, while recognizing the slowing of the US economy is likely to be transitory.”
Key Quotes
“The Fed will likely recognize the improvement in the global climate, but must acknowledge the soft patch that US growth has hit.
Trend growth in the US is estimated to be near 2%. The US economy grew 1.4% at an annualized pace in Q4 15 (the initial estimate was 0.7%). The day after the FOMC meeting concludes, the first estimate of Q1 16 GDP will be released. The median of the Bloomberg survey is 0.6%, which incidentally is also the rough midpoint of the Atlanta Fed GDPNow tracker (0.3% as of April 19) and the newly unveiled NY Fed GDP tracker (0.8% as of April 15).
Fed officials will look through the vagaries of the quarterly movement in GDP. Their confidence that the economy will return to trend growth and that its inflation target will be reached is based on the continued strength of the labor market. This is still the case.
The closest thing to a real-time reading of the labor market is the weekly initial jobless claims. Last week, which is the period of the survey for the national report, weekly initial jobless claims fell to new cyclical lows. It is now at a level not seen since 1973. Continuing claims fell to their lowest level since November 2000.
The June Fed funds futures contract implies almost a 1 in 4 chance of a hike while a Wall Street Journal survey earlier in the month found 75% of economists expect the second hike in June. It is in the Fed's interest to keep its options open and not commit to a June move. The Fed's may upgrade its global assessment, while recognizing the slowing of the US economy is likely to be transitory.”