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The following are the reactions to today’s FOMC meeting as provided by the economists at 10 major banks along with some views on the USD as provided by the FX strategists at these banks.
BofA Merrill: The FOMC statement is modestly USD positive relative to expectations, as June and September remain on the table for the first hike. Downgrades to the growth outlook were largely priced in, given a recent shift in policy expectations and USD selloff. With the Fed still expecting a growth rebound (as transitory factors subside), data needs to validate their view for a more sustained USD rally given the data dependence of their decision to hike rates. References to the USD in the statement were not materially different: “exports declined” as opposed to “weakened” in March. But the mention of import prices was a new and more explicit reference to the dollar, even as the impact on inflation is seen as transitory. Bottom line: modest USD positive, but data will dictate dollar moves going forward.
SEB: After the GDP report earlier today and the March payrolls three weeks ago it was not surprising to see the Fed significantly downgrading the first paragraph, although the Committee suggested that the weakness in part reflected transitory factors. But since the Fed expects better times ahead an increase in the Fed funds rate is still in the cards. That said, a hike as soon as June is not our main scenario or what the consensus is currently looking for. Our forecast is for a September liftoff. As expected, the calendar guidance was removed. Back in March, the FOMC pledged not to raise interest rates in April – no such promise was extended to June. This is not a sign that the probability of a June hike is rising although it remains on the table; our view is instead that the Fed wants flexibility back. The bank is data-dependent after all.
CIBC: The Fed’s latest statement downgraded assessment of the labour market and GDP, as necessary following the disappointing March payroll figures and Q1 GDP today, suggesting they are further away from being “reasonably confident” that inflation will return to their target over the medium term. While the Fed is citing “transitory factors” for the slowdown in GDP during the first quarter, it also takes a more pessimistic view of the labour market saying not just that job gains “moderated” but that the underutilization of labor resources was “little changed”. The Fed is still looking to be “reasonably confident” that inflation will return to their 2% target over the medium term before raising interest rates, but the more pessimistic assessment for growth and the labor market suggests members are further away from having that confidence than they were in March. Following today’s statement and the weak GDP figures earlier we have shifted back our forecast for the first Fed hike to September, from July previously.
Barclays: As we expected, the Federal Reserve left its policy stance unchanged at the April FOMC meeting. The Fed removed the phrase “the committee judges that an increase in the target federal funds rate remains unlikely at the April FOMC meeting” from the statement and did not replace it with any particular reference to calendar time. In our view, the lack of any specific calendar time suggests June will be a “live” meeting, where rate hike deliberations will begin in more earnest. Our view remains that September is a more likely time for the first rate hike, but we expect several on the committee to argue for a rate hike in June, including Richmond Fed President Jeffrey Lacker, who is a voting member in 2015. Fed guidance about rate hikes after mid-year has been a staple of recent FOMC communications, and we read the statement as consistent with this messaging.
Danske: 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 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.
Credit Agricole: As expected, there were no policy changes announced at today’s FOMC meeting. The Fed funds target range was maintained at 0-0.25%. The FOMC made no changes to its portfolio reinvestment policy. The FOMC sees “the risks to the outlook for economic activity and the labor market as nearly balanced.” The key issue for the FOMC, as we see it, is the extent to which the Q1 slowdown in growth is transitory or reflects more persistent factors. We believe that the Fed will want to see convincing evidence that transitory factors were behind much of the slowdown and that the underlying fundamentals suggest that the expected Q2 growth rebound will be sustained with above-trend growth in the second half. Above-trend growth would continue to absorb labor market slack. That should contribute to an acceleration in wages that will further sustain consumer spending and likely put some upward pressure on prices. We see it as highly unlikely that the FOMC would have sufficient evidence to support that scenario until sometime in the third quarter. Based on our macroeconomic outlook, we believe that the most likely scenario for the Fed is to begin the process of rate normalization in September. The risks are currently tilted towards a later rather than an earlier lift-off but a spring growth rebound, solid labor markets and constructive comments from the Fed on the incoming data flow are expected to prepare the markets for a rate hike this fall. The disappointingly weak Q1 real GDP growth (+0.2%) was a mixed picture. Some of the factors behind the slowdown were likely transitory such as the harsh winter weather impact on consumer spending and logistical supply disruptions from the West Coast port slowdown that curbed production. We expect a rebound in current-quarter activity from these transitory depressants. However, the weakness in business investment spending and net exports will likely linger for a while. We project real GDP growth just above 2% in Q2 but accelerating further in the second half to around a 3% growth pace.
NAB: The FOMC statement issued earlier this morning has made it clear that there is no pre-determined timeline for Fed rate lift-off. The Fed is totally data dependent in considering when next to change policy, that data then playing into the Fed’s assessment of progress in their dual mandate of “fostering maximum employment and price stability”. Our assessment is that September remains the next most likely time for the Fed to move. There are two meetings (June 18 and July 30) before the September 18 meeting and it will take time for the Fed to the comfortable that the US economy has not been dislodged from its underlying growth track. How much of the recent softer growth is transitory is yet to play out.
Wells Fargo: Fed officials will want to see the next few months’ indicator performance to better assess the underlying growth trend following the weak first quarter and to gauge whether their outlook of firming GDP growth for the remainder of this year and next remains intact. Shaking off the transitory factors of winter weather and the port disruptions, we believe a moderate rebound is in store for the second quarter as growth in consumer spending and business fixed investment should pick back up. We doubt there is enough time for the economy to rebound in a convincing enough way for the Fed to move in June, but there is still plenty of runway left between now and September. The critical question for the Fed now is how much of the first quarter’s weakness was transitory and how much is longer lasting. This puts more weight on upcoming data, which will soften or harden the Fed’s resolve.
Rabobank: The FOMC statement gave a balanced assessment of the current economic slowdown and the Committee remains very much in a data-dependent mode. However, the balanced and cautious tone in the statement is a far cry from the optimism and (over)confidence that we have seen in previous statements. This suggests that the large majority of doves in the Committee is in no hurry to hike and instead is waiting for solid evidence that the economic recovery can actually deal with a rate hike…The impact of the dollar appreciation is not only holding back economic growth, but also core inflation. Ironically, the strength of the dollar is for a large part caused by expectations of the Fed’s monetary tightening. What’s more, an actual rate hike could lead to further appreciation, giving US exporters hardly any time to adjust to their loss in competitiveness and keeping down core inflation. A premature rate hike would slow down the return of inflation and unemployment to their targets. Therefore, we continue to expect the Fed to delay the first hike to the final quarter of the year.
Deutsche Bank: FOMC statement was balanced and largely as expected. No meaningful slant in either direction that surprises. Only tilts toward not being as dovish as some may have suspected come in: 1) econ “slowed during the winter months, in part reflecting transitory factors” This could equally also be taken as more hawkish since it also infers that some of the slowing is for real/more permanent. More relevant 2). “households’ real incomes rose strongly, partly reflecting earlier declines in energy prices.” This reflects the 6.2% gain in real disposable income in Q1. All other comments fit with the acceptance that the economy has slowed albeit again partly because of transitory factors. They have also not wanted to completely kill off any prospects of a June tightening as they did with the April meeting, but clearly have not wished to tamper with current market expectations that suggest that probabilities of a June tightening are now negligible.