Fed: Taking a Cautious Approach - ANZ
Research Team at ANZ, suggests that the Fed is taking a cautious approach to monetary policy as the global macro and financial environment poses ongoing risks to the US economy.
“In a speech last week, Fed Chair Yellen noted the asymmetry of “conventional monetary policy to respond to economic disturbances” given the current low level of the fed funds rate (FFR). Should the economy progress as forecast then two hikes in the funds rate can be expected in 2016. But it is more difficult for the Fed to reduce the FFR should growth falter or inflation slow.
Data last week were broadly encouraging, highlighting the resilience of the US economy. The March employment report shows that labour market conditions continue to be robust with employment rising by 215k m/m. Over the past six months the strong pace of hiring (average is 244 m/m) is pulling people back into the workforce – the participation rate has risen by 0.5ppt to 63.0%. The unemployment rate rose modestly in March by 0.1ppts to 5.0%, still within the range the Fed deems full employment. Average hourly earnings, closely watched as a precursor to higher services inflation, rose by 0.3% m/m to be up 2.3% y/y.
The manufacturing sector is showing more positive signs of late. The broad-based improvement in the regional Fed manufacturing surveys was confirmed nationally in the ISM index. The index rose to 51.8 in March from 49.5 in February, the first reading above 50 since August 2015. Particularly pleasing was the 6.8pts jump in new orders to 58.3, the highest since November 2014.
This week is relatively data light, with the ISM non-manufacturing survey and the FOMC Minutes the key events. The discussion around global risks and inflation will generate much of the interest. At her post-meeting press conference, Fed Chair Yellen was more dismissive of the recent pickup in core inflation than we expected. She believed that transitory factors were at work and thus questioned the durability of the recent pickup.”
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