Back
18 Mar 2015
FOMC see's dollar set to keep going - ING
FXStreet (Guatemala) - James Knightley, analyst at ING Bank noted that the Federal Reserve left policy unchanged as universally expected, but dropped the wording that it can be “patient in beginning to normalize the stance of monetary policy”.
Key Quotes:
"There were also quite a few other textual changes, including an acknowledgement that “economic growth has moderated somewhat” in the opening line of the statement. Later on it added that the FOMC want to see “further improvement in the labour market” and wants to be “reasonably confident that inflation will move back to its 2% objective over the medium term”. The Fed then suggested that a rate increase “remains unlikely at the April FOMC meeting”, but that “the change in forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range”."
"The main argument for tighter policy stems from the labour market data with unemployment falling, employment rising and labour market slack shrinking. The bit that has been missing is higher pay, but with labour market turnover starting to pick up and with surveys suggesting staff retention is becoming more of an issue for companies, we believe that this is not far away. In any case, the labour market is a lagging indicator and if pay does start to accelerate then the risk is the Fed has to play catch-up and hike more aggressively."
"The counterpoint is that activity data has been disappointing and inflation is low. Certainly, three consecutive monthly falls in retail sales, poor housing data and a soft run in manufacturing output is not encouraging and suggests that the US may struggle to achieve 1% growth in 1Q15. However, bad weather will have had an impact while the disruption at ports on the West Coast has not helped. Consequently, we expect to see a rebound in the next couple of months, which should give the Fed the confidence to start tightening. Indeed, with the Fed now judging whether to raise rates on a meeting-by-meeting basis we continue to favour theJune 17 FOMC meeting as the date for the first rate move."
"Nonetheless, the strength of the dollar is becoming more of an issue even though it wasn’t directly referred to in the statement text – there was merely an acknowledgment that “export growth has weakened”. With monetary policy heading in the opposite direction in many other countries, the dollar looks set to continue strengthening. This is unlikely to knock the Fed off course from tightening, but it may boost the argument for tightening policy more cautiously. We suspect that they may leave policy unchanged in 3Q15 after a June hike before raising rates by another 25bp in 4Q15."
Key Quotes:
"There were also quite a few other textual changes, including an acknowledgement that “economic growth has moderated somewhat” in the opening line of the statement. Later on it added that the FOMC want to see “further improvement in the labour market” and wants to be “reasonably confident that inflation will move back to its 2% objective over the medium term”. The Fed then suggested that a rate increase “remains unlikely at the April FOMC meeting”, but that “the change in forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range”."
"The main argument for tighter policy stems from the labour market data with unemployment falling, employment rising and labour market slack shrinking. The bit that has been missing is higher pay, but with labour market turnover starting to pick up and with surveys suggesting staff retention is becoming more of an issue for companies, we believe that this is not far away. In any case, the labour market is a lagging indicator and if pay does start to accelerate then the risk is the Fed has to play catch-up and hike more aggressively."
"The counterpoint is that activity data has been disappointing and inflation is low. Certainly, three consecutive monthly falls in retail sales, poor housing data and a soft run in manufacturing output is not encouraging and suggests that the US may struggle to achieve 1% growth in 1Q15. However, bad weather will have had an impact while the disruption at ports on the West Coast has not helped. Consequently, we expect to see a rebound in the next couple of months, which should give the Fed the confidence to start tightening. Indeed, with the Fed now judging whether to raise rates on a meeting-by-meeting basis we continue to favour theJune 17 FOMC meeting as the date for the first rate move."
"Nonetheless, the strength of the dollar is becoming more of an issue even though it wasn’t directly referred to in the statement text – there was merely an acknowledgment that “export growth has weakened”. With monetary policy heading in the opposite direction in many other countries, the dollar looks set to continue strengthening. This is unlikely to knock the Fed off course from tightening, but it may boost the argument for tightening policy more cautiously. We suspect that they may leave policy unchanged in 3Q15 after a June hike before raising rates by another 25bp in 4Q15."