- The FOMC leaves “considerable time” guidance unchanged, but raises projections for fed funds…
- …suggesting it will likely begin hiking in June of next year, but will raise rates quicker subsequently
- China set to announce more ‘targeted’ monetary stimulus, but no bazooka
Interest rates near zero for a “considerable time…
The FOMC statement was broadly in line with expectations. The Committee decided to taper its QE-programmes by another USD 10 billion to a level of USD 15 billion and signalled that if the economy and labour market continues to improve it will end the asset purchase programme at its next meeting. Importantly, it left in place the ‘considerable time’ phrase. During the press conference Chair Yellen explained that the term “considerable time” was maintained given the modest reduction in the underutilisation of labour resources and inflation gap with respect to the target. She added that the evolving economic outlook would dictate the policy stance. As such, she asserted that a rate hike is data dependent and not calendar dependent as some analysts may think. Both Presidents Fisher and Plosser voted against the forward guidance suggested by the committee during the FOMC meeting. Both think that a stronger economy and an improved outlook for labour utilisation and price stability require an earlier reduction in monetary accommodation.
…but hint of more rate hikes
Meanwhile, FOMC members expect somewhat more rate hikes over the coming years than previously. Although the median expectation in the ‘dot plot’ was unchanged at 0.125% at end 2014, the pace of the rate hikes is now faster in 2015 and 2016. The median 2015 fed funds forecast rose to 1.38% from 1.13%, while it went to 2.88% from 2.5% in 2016. The median for 2017 is 3.75%, which is in line with the median projection for the long-term. The Summery of Economic Projections did not change much compared to its previous projections. In 2014 the unemployment rate and GDP growth are slightly lower, while there was an uptick in the inflation projections. GDP forecasts for 2015 were downgraded from 3.0-%-3.2% to 2.6% to 3.2%, while 2016 edged up only slightly. The 2017 forecast was added for the first time, indicating a range between 2.3% and 2.5%. The Fed left its inflation and unemployment forecasts largely unchanged in the coming two years as well as in the long-term.
Financial markets still running behind the Fed
Following the FOMC communications and press conference, financial markets move to price in a somewhat higher pace of monetary tightening, with the implied rates from fed funds futures, Treasury yields and the dollar all rising. However, financial markets still appear to be running behind Fed’s guidance. For instance, the 2015 fed funds future is at around 0.8%. This suggests there is still quite some room for upward adjustment. Our base case remains that the Fed will raise rates in June of next year and at each subsequent meeting to reach 1.5% by year end. The Fed’s new scenario is now approaching this.
China: more ‘targeted’ stimulus, but no bazooka
According to local sources, the People’s Bank of China will inject USD 81 bn into the country’s five largest banks. This will be facilitated through the Standing Lending Facility (SLF), which is typically used for smoothing liquidity operations. Demand for liquidity typically rises at the end of each quarter, particularly now that there is a holiday week in early October. The injection should have a similar impact as an overall 50bp RRR cut, although it has ‘selective access’ and a three month maturity. Still, its scale and terms seem to be designed in a way to provide additional stimulus, following disappointing economic data. In our view, these actions still fit the policy of providing ‘targeted stimulus’, instead of using more aggressive easing, which could endanger the strategic goals of economic rebalancing and deleveraging.