Despite the annual rotation of four new voting members to the FOMC (and departure of 4), the Committee did not make any change to the policy rate today. There was, however, a slightly more optimistic tone in the accompanying statement. The statement highlighted the economy’s continued expansion and solid labour market performance adding that confidence measures had improved. The risks to the near term outlook remained "roughly balanced." The members reiterated that rate hikes are expected to be gradual and the fed funds rate is likely to remain below its long-term level for some time. That said there was nothing in the statement to suggest any change from December when the majority of policymakers forecasted the fed funds target range would be lifted three times this year.
Our Take:
Recent reports showed that the economy continued to grow at a moderate pace accompanied by a strengthening in labour market conditions in line with FOMC members’ projections issued in December. Inflation measures have ticked up with both the headline and core CPI rates above 2% while the Fed’s preferred PCE measures are trending higher. Market-based inflation expectations also rose markedly in recent months (see chart below) however policy makers seem unconcerned about this development stating that the implied rates "are still low" and survey-based measures are holding steady.
Friday’s payroll report is forecast to show another solid 175,000 job gain to start 2017 with markets likely to price in more aggressive hikes this year on any upside surprise. However enthusiasm for tighter policy will be contained by the uncertainty surrounding the new Administration’s policies on tax cuts, trade and immigration. Any policy changes that are viewed as negative for growth will quickly see markets unwind expectations of tightening. For now it is more about the degree of policy tightening that is in question, not the need to reduce today’s historically stimulative stance.
