- FOMC October minutes a little more dovish than upbeat statement, with division on communication…
- …but Fed still looks to be on track for the first rate increase in June of next year
- Recent data suggest that central European countries should be able to decouple from Russia
FOMC has mixed views on rate normalisation process
Although FOMC members agreed on the underlying strength of the US economy and the solid labour market, the minutes of its 28-29 October meeting showed that views on how to change the forward guidance were mixed. Meanwhile, there were some concerns about emerging downside risks. There was division about whether to remove the ‘considerable time’ forward guidance – used to signal that rate increases are a way off – as well as on the interest rate policy normalisation process following the first rate hike. It’s true that most participants were in favour of ending QE, but the Committee had not moved any closer to signaling a countdown to the first rate increase. In any case, there was an agreement that it will be helpful to clarify the Committee’s approach to the future path of interest rates given the uncertainty that it could pose for financial markets. This suggests that the Committee could provide more information on its reaction function at the December meeting.
Concerns about global economy tinted FOMC mood
At the time of the October meeting the Committee was concerned about a number of risks, including Ebola, foreign economic developments and the October financial market selloff. However, they decided to downplay the wording in the statement as members judged that the effects on the domestic economy would most likely be limited. As a result, the tone of the minutes was a little more dovish than the statement. Since then, a number of these risks have abated, while US economic data have generally remained strong.
Our view on Fed policy rates
The minutes were a little more dovish than expected despite the consensus on the strength of the labour market. We maintain our view that the Fed will start gradually hiking rates from the middle of next year onwards and in 2016. The path we outline is cautious in the beginning and then more decisive in 2016. We expect the federal funds rate to rise to 1.0% at year-end 2015 and to 3% at year-end 2016. This means a hike every other meeting starting in June 2015 and then the Fed steps up to a rate hike every meeting in 2016, which would be more in line with the last rate hike cycle.
Emerging Europe surprisingly resilient in Q3
Last week’s third quarter GDP data for emerging Europe were surprisingly resilient, with year-on–year growth for the region as a whole coming in at 1.3%, according to our estimates. This marked the same pace of growth as in Q2, though was still sharply down from 2013Q4, when growth peaked at 2.7%. The better-than-expected outcome, for a large part, reflected Russia’s performance, with growth coming in at 0.7% YoY in Q3, only marginally down from 0.8% in Q2 (consensus: 0.3%). Still, it is important to realise that the lion’s share of the fall in the ruble happened in October and November, suggesting that capital outflows intensified in these months. Undoubtedly, this will leave its mark on Q4 growth. Indeed, the bigger picture for Russia is one of an economy, that at best, will stagnate.
Q4 and 2015 will increasingly see sharply divergent trends
In contrast, recent data suggests that growth in central European countries is picking up a bit. For instance, Poland’s manufacturing PMI rose above the 50-mark in October, while we saw a sharp gain in the EC Economic Sentiment Indicator. Meanwhile, in the Czech Republic, we saw a surge in retail sales and industrial production in September, suggesting that momentum was building going into the fourth quarter. The upshot is that there is room for these economies to accelerate next year, in particular if growth in the eurozone picks up, as we expect. This should help to compensate for Russia’s dire outlook, and suggests that growth in emerging Europe as a whole should accelerate modestly in 2015.