- FOMC minutes suggest officials divided on timing of hike, but many saw gradual pace
- Our view is the Fed will raise rates from September once every other meeting
- Eurozone retail and car sales point to surge in consumer spending in Q1
FOMC: some in favour of June, others wanted to wait
The discussion in the March FOMC meeting focused on the guidance the Committee should give on the path of rate hikes according to the minutes. Members judged that in light of the considerable progress made in achieving maximum employment and the implications for the inflation outlook, it was appropriate to remove the word “patient” in describing the timing of a rate hike. Instead including the “reasonably confident” language about meeting the inflation goal would provide the Committee with the flexibility to begin raising rates in June or in a subsequent meeting. Several participants saw June as a possibility for the liftoff, while ‘others’ were in favour of waiting until ‘later in the year’. This shows that FOMC members are divided on the exact timing of the rate hike, but most are in favour of an increase this year.
After liftoff, pace of rate hikes gradual
Many participants commented that it would be desirable to provide additional information to the public about the FOMC’s strategy after the first rate hike. Some participants emphasized that the stance of policy would remain highly accommodative even after the first rate hike. Several noted that a data dependent approach would not necessarily imply increases in the target rate at every meeting. We are of the view that the pace of rate hikes will be gradual in 2015 with a rate hike every other meeting starting in September.
Despite temporary factors, economy strong
The FOMC remained confident in the outlook for the US economy. Members mentioned that temporary factors, including severe winter weather and labour disputes in the West Coast ports had hurt certain activities, but mentioned that service-sector activity remains reasonably strong. They also saw broad-based improvements in labor market conditions. Of course job growth slowed in March after the FOMC meeting, but this soft number was played down yesterday by New York Fed President William Dudley. We think that the slowdown in the economy is temporary and that the economy and the labour market will pick up going forward.
Eurozone retail sales show limited payback
Retail sales slipped by 0.2% in February, but that followed a 0.9% gain in January and a 0.6% rise in December. The series tends to be volatile and the limited payback in February points to a strong underlying trend. Given that car sales have also being growing robustly, this bodes well for consumer spending. Indeed, our monthly consumer demand indicator – made up of a weighted average of the two – suggests that consumer spending is on track to grow by around 1% qoq in Q1. The fall in oil prices and improving household expectations about labour market prospects are leading to stronger consumer demand.
German orders disappoint, but likely to rebound
German factory orders fell by 0.9% mom in February, following a 2.6% drop in January (revised upward from -3.9%). The outcome disappointed and was in sharp contrast to the significant rising trend seen in the orders components of the Ifo and PMI surveys for the manufacturing sector. Fundamentals also point up, with the fall in the euro and improving global demand set to lift exports, while German companies look set to step up investment. We therefore would expect a bounce in orders going forward.