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Fed lift-off in December but cautious approach for 2016 – Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 19, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Westpac, notes that the minutes of the October FOMC policy meeting signal that the Committee is, by and large, in agreement that a first rate hike at the December meeting is a strong possibility and this probability has firmed further since, on the back of recent jobs and inflation data.

    Key Quotes

    “The labour market remains critical for the FOMC’s policy assessment. In October, “Almost all members agreed that, even though the pace of job gains had slowed and the unemployment rate had held steady over the intermeeting period, labor market indicators, on balance, showed that underutilization of labor resources had diminished since early in the year”.

    Further, from the tone of the discussion, it was clear that the majority believed the economy was at or near full employment. For those who disagreed at the time of the meeting (seeing greater slack and a risk that momentum had been lost), the subsequent October employment report will have provided comfort, with the pace of hiring accelerating again; positive back revisions; and a further decline in the unemployment rate.

    Inflation remains the one key area of concern for the Committee, with headline inflation remaining near zero and inflation expectations stable well below their long-term average. “Nonetheless, participants generally continued to anticipate that, with appropriate monetary policy, inflation would move toward the Committee’s objective over the medium term, reflecting the anticipated tightening of product and labor markets, the waning of downward pressures from energy and import prices, and stable inflation expectations”.

    The conclusion from this broad discussion is that “Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation... conditions could well be met by the time of the next meeting”. This would provide scope for the first US rate hike in close to a decade.

    Specifically, “participants generally agreed that it would probably be appropriate to remove policy accommodation gradually”. It was also noted that “beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow”, keeping term rate expectations contained and giving the economy more time to adjust to the new policy paradigm. All of this argues for a first rate hike in December, but a cautious FOMC through 2016.”
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