There has been much publicity given
to the so-called ‘dot plot’ of interest
rate rise expectations, where the members of the Federal Open Market Committee (FOMC)
mark their individual estimates of where the core rate will be in the future.
Well, here it is (above). It was flashed on the screen during the press
conference that followed the monetary policy statement yesterday. It is, of
course, subject to change.
The Chair of the FOMC was very clear
about the committee’s policy of not providing anything that could be
characterised as forward guidance. She said that they “Do not expect to follow
any mechanical approach to raising the Federal Funds Rate”. This means that the
Fed will not be announcing that rates will rise when, for example, the
unemployment rate falls to a certain level. Not only will there not be any
formula for rate rises, but they will always in the future be data dependent.
This really means that they are reserving the right to change their minds about
even the relative significance of any individual economic indicator.
Inflation
is now key, but interest rate rises had been priced in
Ms Yellen made it clear that the Fed
does not expect inflation to rise significantly in the near-to-mid-term. She
said that both the price of oil and the strength of the dollar have
‘stabilised’, so that inflation should start to firm, but that it will not be
growing towards the target rate of 2% per annum at any time soon. She said that
“any rise in the price if energy will take some time to wash out” of the
current low inflation calculations.
The reaction of the EURUSD to the
monetary policy statement and press conference was such as to indicate that the
Forex market had already priced in rate rises. The pair took off to the upside
(the dollar weakened). The statement talks about depressed employment
expectations and a slower growth of GDP than as previously seen, as a result of
a poor first quarter of 2015. All of this, with the inflation expectations
noted, do not presage anything like a fast move to monetary normalisation, for
which read significant interest rate rises.
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