Global Daily – Putting the symmetry back into inflation targeting

by: Bill Diviney , Aline Schuiling

Fed View: FOMC re-emphasises symmetry of 2% target

The FOMC kept interest rates unchanged at 1.50-1.75% at its 1-2 May policy meeting, as was widely expected. The Committee appears much less concerned about inflation now that it has moved back up to its 2% target on an annual basis, and this was most clearly reflected in the removal of the reference to ‘monitoring inflation developments closely’ from its statement. One surprise addition, however, was the second use of the word ‘symmetric’ in relation to the 2% target. While reference to the symmetry of the Fed’s target has long appeared in a stock part of statements towards the end, by using the word a second time earlier in the statement, the Committee clearly wishes to underline its importance. Indeed, although officially speaking the Fed’s 2% target is supposed to be symmetric – i.e. that it has as much tolerance for inflation a bit above target as it does below target – the Fed’s own survey evidence suggests the public believes otherwise, and that the Fed sees 2% as a ceiling on inflation. How successful the Fed is at convincing markets that the 2% target is symmetric will likely be key in determining the outcome of the ongoing debate on changing the policy framework (see here).

What does this mean for monetary policy? The Fed looks committed to raising the fed funds rate towards and ultimately a bit above the estimated neutral rate over the coming quarters, and we continue to expect a 25bp hike at each press conference meeting until June 2019 (i.e. five more 25bp hikes, taking the fed funds rate to 2.75-3.00%). By emphasising the symmetry of the 2% target, we believe the Fed is signalling to markets that even if inflation were to move somewhat above 2% in future, that it would not necessarily hike at a quicker pace than once per quarter to fight it, but rather that it would show as much tolerance for such higher inflation as it has done for lower inflation. (Bill Diviney)

Euro Macro: Q1 growth slows down in line with the expectations

Eurozone GDP growth declined to 0.4% qoq in Q1, down from 0.7% in Q4. The growth number was in line with the consensus forecast and slightly below our own forecast of 0.5%. Having said that, the first estimate of growth is based on monthly economic activity data for January and February only, as no major data for March has been published yet. As the January-February data tends to be distorted by weather conditions and the timing of winter holidays, there is a reasonable probability that GDP numbers will be revised at a later stage. No details of growth were published yet, but we think the slowdown compared to Q4 is likely due to weaker consumption and exports growth, whereas fixed investment probably remained an important driver for growth in Q1 (as we explained in our preview to the GDP data, here). Looking ahead, we expect growth to strengthen again somewhat in Q2 and remain well above the trend rate throughout this year. Importantly, our base case for growth in the eurozone assumes a benign outcome of the trade dispute between China and the US, without any serious consequences for the eurozone economy. (Aline Schuiling)