FOMC Meeting: Still on track for a September hike

Investment Research — General Market Conditions
29 April 2015
FOMC Meeting
Still on track for a September hike
Downbeat on the past but still confident on the outlook
The statement from the 28-29 April FOMC meeting had a clear division between the
description of developments since the last meeting on 18 March and the forward-looking
The latter was basically unchanged (see comparison below) except for an added sentence
stating that despite Q1 weakness in the economy, the FOMC still believes the economy
will expand at a moderate pace and labour market indicators will move to levels
consistent with the dual mandate.
However, the former described the downbeat nature of recent data releases. It summarised
that economic growth slowed over the winter months but that this in part reflected
transitory factors. Further, the pace of job gains moderated, underutilisation of labour
resources was little changed, growth in household spending declined; Business fixed
investment softened, the recovery in the housing sector remained slow and exports
declined. On the positive side, and in our view a key reason to expect a rebound in growth
in the current and coming quarter, the statement mentioned that households' real incomes
rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment
remains high.
In terms of inflation, the statement said that inflation continued to run below the FOMC’s
objective but did not directly mention the recent stabilisation in core inflation. The
forward-looking paragraph on inflation repeated that the Committee expects inflation to
rise gradually towards 2% over the medium term as the labour market improves further
and the transitory effects of declines in energy and import prices dissipate, with import
prices replaced the previous formulation other factors.
In our view, the statement is consistent with an FOMC that remains on track to hike rates
this year, conditional on a rebound in GDP growth in the current quarter and employment,
which accelerates to an above 200,000 per month average again in coming months. Thus,
we stick to our expectation that the Fed will deliver a first 25bp rate hike in September
this year.
Yields and the USD to move higher as first hike draws closer
After a general upward trend in US treasury yields this week, yields barely moved on the
FOMC statement. The first hike from the Fed is now fully priced in December this year
but the path of hikes over the following two years remains extremely subdued. We
continue to expect US economic data to show improvement over the coming months and
the labour market to continue to tighten. Hence, we stick to our call of a first Fed funds
rate hike in September this year, which will, in our view, pave the way for significantly
higher rates in the 2-5Y segment of the curve in coming months as the first rate hike
draws closer. Looking at past hiking cycles, rates have started to move higher three to
four months ahead of the first hike and we think the current cycle will be no different.
Senior Analyst
Signe Roed-Frederiksen
+45 45128220
[email protected]
Senior Analyst
Morten Helt
+45 45128518
[email protected]
Important disclosures and certifications are contained from page 4 of this report.
FOMC Meeting
The US dollar has corrected lower recently in a broad-based decline against most major
currencies. In particular, the combination of a very stretched speculatively long USD
positioning, as indicated by the IMM positioning data, and weak US data has been a
negative mixture for greenback.
The deterioration in risk sentiment following the weak Q1 GDP data from the US today
was also a driver behind the acceleration in USD selling this afternoon. However, the
USD has recovered a little following the FOMC announcement, as the statement did not
provide much new information and we continue to expect EUR/USD to fall over the
coming three to six months on relative monetary policy expectations. A near-term
stabilisation in EUR/USD will probably be subject to a general improvement in risk
sentiment, while the next leg lower in the cross is likely to depend on positive US data
surprises. Historically, the USD tends to strengthen in periods when the Fed stops easing
and until it starts to tighten. We see no reason why it should be different this time,
particularly as we expect the ECB to continue its quantitative easing programme until at
least September 2016.
Comparison of statements
Release Date: March 18April 29 2015
For immediate release
Information received since the Federal Open Market Committee met in JanuaryMarch
suggests that economic growth has moderated somewhat. Labor market conditions have
improved further, with strong slowed during the winter months, in part reflecting
transitory factors. The pace of job gains moderated, and a lowerthe unemployment rate
remained steady. A range of labor market indicators suggests that underutilisation of
labor resources continues to diminish. Household spending is rising moderately; declines
in energy prices have boosted was little changed. Growth in household purchasing
powerspending declined; households' real incomes rose strongly, partly reflecting earlier
declines in energy prices, and consumer sentiment remains high. Business fixed
investment is advancing, whilesoftened, the recovery in the housing sector
remainsremained slow, and export growth has weakenedexports declined. Inflation has
declined furthercontinued to run below the Committee's longer-run objective,
largelypartly reflecting earlier declines in energy prices and decreasing prices of nonenergy imports. Market-based measures of inflation compensation remain low; surveybased measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expectsAlthough growth in output and
employment slowed during the first quarter, the Committee continues to expect that, with
appropriate policy accommodation, economic activity will expand at a moderate pace,
with labor market indicators continuing to move toward levels the Committee judges
consistent with its dual mandate. The Committee continues to see the risks to the outlook
for economic activity and the labor market as nearly balanced. Inflation is anticipated to
remain near its recent low level in the near term, but the Committee expects inflation to
rise gradually towards 2% over the medium term as the labor market improves further and
the transitory effects of energy price declines in energy and other factorsimport prices
dissipate. The Committee continues to monitor inflation developments closely.
29 April 2015
FOMC Meeting
To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0.00-0.25% target range for the
federal funds rate remains appropriate. In determining how long to maintain this target
range, the Committee will assess progress--both realised and expected--toward its
objectives of maximum employment and 2% inflation. This assessment will take into
account a wide range of information, including measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial and
international developments. Consistent with its previous statement, the Committee judges
that an increase in the target range for the federal funds rate remains unlikely at the April
FOMC meeting. The Committee anticipates that it will be appropriate to raise the target
range for the federal funds rate when it has seen further improvement in the labor market
and is reasonably confident that inflation will move back to its 2 percent objective over
the medium term. This change in the forward guidance does not indicate that the
Committee has decided on the timing of the initial increase in the target range.
The Committee is maintaining its existing policy of reinvesting principal payments from
its holdings of agency debt and agency mortgage-backed securities in agency mortgagebacked securities and of rolling over maturing Treasury securities at auction. This policy,
by keeping the Committee's holdings of longer-term securities at sizable levels, should
help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a
balanced approach consistent with its longer-run goals of maximum employment and
inflation of 2%. The Committee currently anticipates that, even after employment and
inflation are near mandate-consistent levels, economic conditions may, for some time,
warrant keeping the target federal funds rate below levels the Committee views as normal
in the longer run.
Voting for the FOMC monetary policy action were Janet L. Yellen (Chair), William C.
Dudley (Vice Chairman), Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M.
Lacker, Dennis P. Lockhart, Jerome H. Powell, Daniel K. Tarullo and John C. Williams.
29 April 2015
FOMC Meeting
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The
authors of this research report are Signe Roed-Frederiksen, Senior Analyst, and Morten Helt, Senior Analyst.
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29 April 2015
FOMC Meeting
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29 April 2015