FOMC: Data to determine post-June rates outlook – Nomura

Analysts at Nomura suggest that the latest FOMC statement provided only a few nuances to their view on the likely trajectory of policy and the main changes were related to inflation.

Key Quotes

“With PCE prices up 2.0% on a y-o-y basis, and core PCE prices up 1.9% in the most recent month (March), the Committee acknowledged that inflation had moved “close to 2 percent.”

“The Committee made two subtle changes to deemphasize potential concerns about inflation moving above its 2% target. First, the Committee noted that its inflation target was “symmetric.” Second, it dropped its longstanding statement that the Committee was “monitoring inflation closely.” Both of these changes suggest that the Committee is not going to overreact if inflation moves somewhat higher from here.”

“In addition, the FOMC gave no real sense that it expects the economy to accelerate. Note that its forecasts for growth this year are above the pace of GDP growth just reported for Q1. By itself, that implies that the FOMC expects the economy to accelerate and is consistent with the fiscal stimulus that is coming. However, the statement noted that “risks to the economic outlook appear roughly balanced.” Moreover the statement did not note that the mild slowdown in Q1 was expected to be temporary.”

“These small changes do not really change our perception of the trajectory that the FOMC is on. We think the FOMC is very likely to raise rates again at its next meeting (12-13 June). In our view, it would take a major change in the outlook, most likely reflecting some sort of financial shock, to deter the next rate hike. The issue more at stake for the June meeting is what the FOMC will signal for H2 2018.”

“For the economic outlook, labor market data have been strong this year and we expect Friday’s employment report to continue this trend: job growth of 220k for April and the unemployment rate falling to 4.0%. For GDP, we expect about 3% growth in Q2 and even stronger growth in Q3 owing largely to fiscal policy.”

“If the data released between now and the June meeting confirm those basic views, we would expect the FOMC to signal two more hikes in the second half of the year (four altogether in 2018). On the other hand, if the data suggest that the economy has slowed materially from the H2 2017 pace, we would expect the FOMC to signal less certainty about the course of policy for the rest of this year. We will be assessing the incoming data with that in mind.”