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FOMC: Outlook is evolving – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 29, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Lewis Alexander, Research Analyst at Nomura, suggests that the recent FOMC statement highlighted a challenge for the FOMC and market participants.

    Key Quotes

    “The Fed, in effect, acknowledged that recent economic data have been weak and that recent financial and foreign developments may pose a risk to the US economy. Essentially, the FOMC was sending a signal that its assessment of the outlook may be moving closer to that of the market.

    But financial markets took the FOMC’s statements not as a sign that the gap between the market and the Fed was closing, but rather as a reason to reduce their expectations for future rate hikes even more. That may have been an overreaction. We would still argue that the right forecast is for two increases in short-term interest rates this year, while the market is pricing only about one.

    Financial conditions have tightened notably. Moreover, our outlook on the rest of the world is at the low end of the Consensus. Thus, we suspect that the FOMC’s outlook is bound to become more pessimistic. This will likely be reflected in the Summary of Economic Projections (SEP) that will be released at the next (March) FOMC meeting and it supports our expectation that the FOMC will not raise rates at that meeting.

    However, we expect somewhat faster growth in the second half of the. We do not think the risk of a recession is particularly large. We also expect core inflation to rise somewhat over the course of the year. That is why we still argue that the right base case forecast is for two hikes this year, with the next one in June.

    It is also worth noting that the FOMC made two subtle changes to its statement of long-term strategy. The new statement says the FOMC will be “concerned” if inflation deviates “persistently” from its target. This may be intended to be a signal of the FOMC’s determination to get inflation back up to its 2% target.

    The new statement also mentions for the first time that the FOMC’s 2% target is symmetric. The implication is that it is not intended to be a ceiling but rather the middle of a range. Both of these changes may have been intended, among other reasons, to bolster inflation expectations at a time when expectations have moved lower.”
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