Wednesday, June 17, 2015

FOMC: Steady, very steady, as she goes | Inflation is now key

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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