FOMC confirmed upbeat economic outlook and expectations for rate hike in June
Macroeconomic overview:
- The minutes of the May 2 FOMC meeting once again displayed the Committee’s optimism in the economic outlook and increased confidence that the 2% inflation target will soon be reached. As a result, the next rate hike will be coming in June. At the same time, FOMC members are currently not worried about any too sharp rise in inflation, which would require a faster policy normalization. This, in combination with other concerns and uncertainties, e.g. about trade and fiscal policies or the shape of the yield curve, means that the policy normalization will continue to occur gradually. Moreover, the minutes telegraphed potentially upcoming changes in the rate setting process and the Fed’s communication. Forward guidance and a range for the fed funds target rate may soon be things of the past.
- In line with expectations, the minutes revealed that a large majority of Fed officials thinks it is warranted that the fed funds target rate will be raised again at the upcoming meeting in mid-June: “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.”
- The minutes displayed once again increased optimism in the economic outlook and increased confidence in hitting the 2% inflation target: “Participants commented that above-trend growth in real GDP in recent quarters, together with somewhat higher recent inflation readings, had increased their confidence that inflation on a 12-month basis would continue to run near the Committee’s longer-run 2% symmetric objective.”
- At the same time, FOMC members are currently not worried about any too sharp rise in inflation, which in turn would require a faster policy normalization. The Committee already emphasized in the post-meeting statement that the inflation target is “symmetric”, which means that the Fed will tolerate a moderate inflation overshoot. And the minutes even argued that “a temporary period of inflation modestly above 2% percent […] could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.” Moreover, “it was noted that it was premature to conclude that inflation would remain at levels around 2%, especially after several years in which inflation had persistently run below the Committee’s 2% objective.”
- Fed officials also discussed various risks and uncertainties. Those include the outlook for fiscal and trade policies as well as the shape of the yield curve. With regard to the latter, the FOMC seems to be split about the message from the flatter curve. While “a few participants” thought that various factors have made the slope of the yield curve a less reliable signal of future activity, several participants thought that it would be important to continue to monitor the curve, “emphasizing the historical regularity that an inverted yield curve has indicated an increased risk of recession.”
- Finally, the minutes telegraphed potential changes in the rate setting process and the Fed’s communication. With regard to the Fed’s communication, “some participants noted it might soon be appropriate to revise the forward-guidance language in the statement indicating that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” or to modify the language stating that “the stance of monetary policy remains accommodative.” The obvious backdrop is that with each further rate hike, the fed funds target rate gets closer to the equilibrium rate. The policy stance is thus becoming less and less accommodative, which at some point will have to be acknowledged in the official rhetoric. While we think that the Committee can afford to wait for a few more rate hikes, and thus a few more months, before making the adjustment, such a language change can come as soon as in June.
Technical analysis and trading signals:
- Two-day EUR/USD decline from 1.1830 based at 1.1676 and a modest adjustment underway early Thursday. We see slight decline in daily bearish momentum. In our opinion a consolidation is the most likely EUR/USD theme in the near term.
- We opened USD/JPY short at 109.70 today. The target is 108.10
TRADING STRATEGIES SUMMARY:
FOREX - MAJOR PAIRS:
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