Despite an unexpectedly weak jobbrapport for may and doubts inflationstrenden economists and the market broadly agree that the Federal Reserve will raise its key interest rate on June 14, in such a case, the fourth increase since the Fed began the retreat from the ”near-zero” level in december 2015.
The questions before the meeting is more about what the Fed committee (FOMC) may provide for notice of a future reduction of the balance sheet and what the new projections imply about future interest rate hikes.
Of the 81 economists who have so far responded in a Bloomberg News prognosenkät think 76 to ränteintervallet raised by 25 basis points, to 1.00-1.25 per cent, while five believe that it is left unchanged.
According to CME Groups ”FedWatch Tool,” suggesting the market’s pricing of over 95% probability of ränteintervallet to be raised at this meeting.
The economists at Credit Suisse in New York notes, in a by client letters that even if the employment increased less than expected in may, so shows the low rate of unemployment that the unutilised resources in the labour market is rapidly decreasing.
The unemployment rate fell to 4.3 per cent in may, the lowest since the beginning of 2001, and well below the 4.7 percent that was the average for the members the long-term arbetslöshetsprognoser in march.
With regard to employment increased by unexpectedly weak 138,000 people in may, it may also be worth noting that it is still more than what most Fed members believe that it is required to keep pace with the arbetskrafttillväxten long-term. And an even weaker employment growth in may 2016, +50.000, was also followed by the two strongest sysselsättningsmånaderna during the whole of last year, in June and July, when the number of employed increased by close to 300,000 two months.
Credit Suisse-the economists notes, moreover, that inflation, although it has surprised on the downside recently, but tillväxtdata has been ”solid”.
”In our view it would require a substantial miss in retail sales or the CPI (as published prior to the FOMC announcement on Wednesday) to travel questions about a tightening in monetary policy,” writes Credit Suisse-economists.
Also, the economists at Capital Economics believe that a rate hike on Wednesday, in principle, is ”petted and clear.” They note that the current inflation has not reached up to expectations but for the present adds the Fed-the members greater emphasis on the labour market, where multiple indicators show that the available resources are shrinking.
But even though the current statistics did not give reason to doubt that the Fed will raise interest rates now so believe Capital Economics that it has made the Fed’s job for the rest of the year much more difficult. At the same time that the unemployment rate is already 2 tenths of a percentage point below the Fed’s forecast for the end of the year, core PCE inflation has fallen to just below 1.5 per cent.
It means that the Fed members will likely need to adjust down their arbetslöshetsprognoser further, but perhaps also the forecasts for the long-term equilibrium rate of unemployment which would signal that they see room for some further decline.
Credit Suisse-economists believe that snittprognosen for the unemployment rate at the end of 2017 is reduced to 4.3-4.4 per cent and to sittprognosen for core PCE inflation is reduced from 1.9 to 1.7 per cent at the end of the year.
Regarding the Fed members’ forecasts for 2017 think both Credit Suisse as Capital Economics that the consensus forecast will continue to point towards a total of three interest rate rises in 2017, that is to say until after the increase in march and the likely increase in June. Prognosspannet learn, however, decrease from the 0.9-to 2.1 percent as was the range in march.
The pricing in the market, according to CME Group, suggests, however, only about a 50% probability that the Fed will raise rates one more time in the years after the likely increase on Wednesday. And the probability of a price increase in september to be praised just to barely 28 percent.
As the Wall Street Journal’s Nick Timiraos noted, it is not only the hesitancy around inflationstrenden which has lowered expectations of a rate hike in september; a relatively new source of uncertainty is the question of whether congress and the White house can agree to raise the debt ceiling and approve funding for the financial year beginning on 1 October.
The former likely the Fed plan to raise interest rates again in september and then start balansräkningsprocessen at the end of the year will be considerably less likely if a tough budgetfajt shaking financial markets around the FOMC meeting on 19-20 september.
Regarding the Fed’s plans on a strategy for later, start reducing the balance-sheet showed the minutes of the majmötet to these already then had come a long way.
According to the protocol was ”almost all” members agree that reinvesteringarna of the proceeds from maturing securities shall be reduced by the pre-announced schedules with the ”gradually rising ceiling”, and that it would be appropriate to initiate the downsizing of the balance sheet in the year. The question is whether the Fed is ready to present its plans now on Wednesday.
”If the Fed is serious about reducing the size of its balance sheet in the year and to communicate these plans well in advance so start time may be a button to do it,” writes Capital Economics, who sees several advantages for the Fed to formally announce their plans already now.
For the first would it give the Fed time to assess the market response on the announcement before the normalization actually begins. Second, a delay of the announcement until september, or risk being left in the middle of a potential skuldtakskris. Third, it would give the Fed more flexibility in the decision of whether to continue raising interest rates in a gradual pace.
”If everything goes smoothly, the Fed continued to raise rates at the september and decembermötena and at the same time begin to reduce the reinvesteringarna in the fourth quarter,” writes Capital Economics.
No formal detailed plan to reduce the balance sheet, however, should not be expected already in the statement in connection with the minimum bid rate on Wednesday, according to Credit Suisse-economists. The does, however, expect Fed chief Janet Yellen can offer details in connection with the subsequent press conference, and that further clarification may come in the minutes of the meeting.
It may not be , nor shall be ruled out that the Fed put out a separate message with more details about the balansräkningsplanerna.
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