FOMC preview: Status quo on expected lines

Transcription

1 In Focus: US Fed Treasury Research Group For private circulation only FOMC preview: Status quo on expected lines We expect the Fed to maintain status quo with minor changes made to the policy statement. No changes are expected on the outlook on the either the economy or inflation. We maintain our call of a very high probability of a 25 bps rate hike in December Market response is likely to remain limited given that status quo is priced in. The outcome of the US mid-term elections is likely to be a more prominent driver in the near-term. November 6, 2018 Shivom Chakravarti shivom.chakravarti@icicibank.com Tel no: Ashray Ohri ashray.ohri@icicibank.com Tel no: No substantial changes in the policy statement The FOMC meeting in November-2018 is likely to prove as a relatively minor event given that no press conference is due for release and no new economic projections are expected to be released either. The policy statement on aggregate could remain relatively unchanged with the Fed making small cosmetic changes in response to recent data developments post the previous meeting in September The labour market is still strong and Q32018 GDP growth came in at 3.5% that was above expectations and above the trend level of growth. Private consumption is fairly robust as well and consumer confidence remains at record high levels. The only two areas of concern are the fact that business investment spending has slowed relatively to the Q22018 and the housing sector is showing early signs of strain. Hence, there could be modest changes in the policy statement to acknowledge these developments. Even while financial conditions have tightened at the margin with the USD rising sharply and equity markets falling, the impact has so far not been felt on the real economy. Hence, the risks to growth outlook are likely to be still considered to be balanced. Given that inflation is hovering around the 2% mark, no major changes are expected in the inflation assessment. There is unlikely to be any substantial concerns expressed about the state of global trade-wars either. The statement should continue to reiterate that further tightening is on the cards. The release of the FOMC minutes in a fortnight s time could perhaps provide more of an insight about the opinions of the members of the FOMC than the post policy statement. Fed speak: A quick review Please see important disclaimer at the end of this report The following are the key statements by the policy makers: FOMC members signaled continued strength in the economy with the inflation remaining benign near their target rate. They signal a healthy environment to scale back the unusual policy accommodation seen post the financial crisis. Federal Reserve Chair Powell: He emphasized that the economy is strong with growth running at a healthy clip along with low and stable inflation subsequently all these developments are very good signs. His main emphasis on the numerous speeches made was that monetary policy would continue to tighten by saying that as the economy has steadily gained strength, the Fed has been gradually returning interest rates closer to the levels that are normal in a healthy economy.

2 Vice Chair Clarida: His tone remained fairly upbeat by saying that the economy is in its 10 th year of expansion and that both total and core PCE inflation are now running close to the FOMC s 2% objective. He further emphasized that the labour market continues to surprise on the upside for nearly two years and that would mean continued need for removing the extraordinary degree of accommodation that was put in place in the aftermath of the Global Financial Crisis. Market implications: With the market pricing in status quo in November-2018 and ~74% probability of a 25 bps rate hike in December-2018, we do not expect a substantial market response. Instead, the outcome of the mid-term elections is likely to emerge as a more prominent driver in the near-term. Chart 1: ISM surveys remain robust Chart 2: Consumer confidence at a record high Manufacturing PMI Non-manufacturing PMI US Conference board consumer confidence Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Source: Bloomberg, ICICI Bank research Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Source: Bloomberg, ICICI Bank research Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 2

3 ICICI Bank: ICICI Bank Towers, Bandra Kurla Complex, Mumbai Phone: (+91-22) Treasury Research Group Economics Research Kamalika Das Economist (+91-22) (ext 6280) Shivom Economist (+91-22) (ext 6273) Chakravarti Anushri Bansal Economist (+91-22) (ext 6220) Sumedha Economist (+91-22) (ext. 7243) Dasgupta Ramakrishna Economist (+91-22) (ext. 6943) Reddy Bogathi Ashray Ohri Economist (+91-22) (ext. 7249) Pradeep Kumar Economist (+91-22) (ext. 6272) Yash Panjrath Economist (+91-22) (ext. 8161) Sparsh Chhabra Economist (+91-22) (ext. 7309) Treasury Desks Treasury Sales (+91-22) Currency Desk (+91-22) Gsec Desk (+91-22) FX Derivatives (+91-22) /43 Interest Rate Derivatives (+91-22) Commodities Desk (+91-22) Corporate Bonds (+91-22)

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