US: Balance of risks improved - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that in its 1 Feb policy press release, the FOMC said, “Near-term risks to the economic outlook appear roughly balanced and the Committee continues to closely monitor inflation indicators and global economic and financial developments.”  This repeated the same words since the outlook for risk was upgraded to “balanced” in September last year, after spending much of last year with more risk seen to the downside.

Key Quotes

“In his speech on 28 February, NY Fed President Dudley suggested the balance of risks were now tilted to the upside; contributing to an urgency to hike “fairly soon.”  He said, “After the election we’ve seen very large increases in household and business confidence, we’ve seen very buoyant financial markets — the stock market is up, credit spreads are narrow. And we have the expectation that fiscal policy will probably move in a more stimulative direction. So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.”

“On the effect of fiscal policy Dudley said, “We do know that fiscal policy is going to move in a more stimulative direction. So what that says to me is that the risks to the outlook are now starting to tilt to the upside. So while I haven’t really built it into my GDP forecast, when I think about the balance of risks — up or down in terms of economic activity — I think the fiscal side tends to push things — the risks to the upside.”

“Even if the FOMC may be reluctant to actually build-in higher fiscal policy into its forecast, it should tilt the risks higher.  If the market begins to think the same way, it may start to project rates rising faster than projected by the median FOMC projection.”

“The rates market has been conditioned to project fewer hikes than the Fed projects, but the equity market appears to be building in tax cuts and more fiscal spending, and the risk is that this expectation starts to filter into a higher yields and/or USD exchange rate expectations.”