US: No Consensus from Within - ING
James Smith, Economist at ING, suggests that the latest Fed minutes show that a range of views persist within the FOMC, which suggests little prospect of a near-term rate hike.
Key Quotes
The minutes to the March 15-16 FOMC really repeat the mixed tone that was underlined at the time the announcement was made whereby Esther George voted for a rate hike yet the forecast of committee members suggested that the Fed only anticipated hiking rates twice this year rather than four times, as they projected back in December.
Indeed, the minutes state that some participants "indicated that an increase in the target range at the committee's next meeting might be warranted if the incoming data remained consistent with their expectations for moderate growth in output, further strengthening of the labour market and inflation rising to 2% over the medium term". This sentiment appears to be backed by recent comments from FOMC members Eric Rosengren, John Williamson and Dennis Lockhart. In fact the minutes show that one official actually supported Esther George's call for a rate hike initially, but did not carry that through to the vote.
However, the minutes also suggested that "a number of participants judged that the headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly". Furthermore, several argued that a "cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April, would signal a sense of urgency they did not think appropriate".
In the end, the committee agreed that the FOMC should "proceed cautiously in adjusting policy", a sentiment that was repeated by Fed Chair Janet Yellen's speech last week. They clearly remain concerned about external risks and are worried that inflation expectations might be slipping lower, "skewing the risks to the outlook for inflation to the downside".
As such, it makes a rate hike at the next meeting look highly unlikely while the probability of a move soon after that is not particularly high. Nonetheless, we disagree with market pricing that favours no further policy changes this year.
With the economy creating jobs, business surveys pointing to decent growth and inflation likely to rise in response to a tightening labour market pushing up wage costs and commodity prices gradually moving higher we believe enough members will be convinced of the need for higher rates later this year. We continue to favour one rate hike, most probably in 3Q16, with two more hikes in 2017, taking the policy rate to 1%.”
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