fomc june 2018 decision - preview
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Monday, 11 June 2018


  • FOMC expected to hike Fed funds rate by 25bps to 1.875pct
  • QT balance sheet program set to continue apace
  • FOMC official statement seen backing up upbeat, hawkish May minutes, Beige Book
  • 'Dot Plot' to confirm three-four rate hike trajectory
  • Updated Summary of Economic Projections also due, all at 1800 GMT on Wednesday


In spite of the fractious G7 meeting and the yet-to-be-determined outcome of the US-North Korean summit to end the 68-year-old Korean War, US monetary policy makers are expected to stick to the script of a June tightening.


Neither accusations of ‘bad-faith’ diplomacy on the trade front amongst allies nor geopolitical uncertainties are seen swaying the US Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday from a 25-basis-point hike in the Fed funds rate to 1.875 pct, or a target range of 1.75pct to 2.0pct.


The FOMC is also expected to remain on track with its quantitative tightening schedule. Beginning July, the amount of Treasuries and agency debt that it will allow to roll off its balance sheet without re-investment will be increased to $40 billion per month from $30 billion in Q2. In October, it rises to $50 billion a month through December 2018.


CME FedWatch is pricing in a 91pct chance for a 25bps rate this week, a two-percent chance for a hike in August and a 70-pct chance for a 25bps rate hike at the Fed’s 26 September meeting.


The FOMC announcement is due at 1800 GMT on Wednesday, 13th June, followed by Fed chair Jerome Powell’s press conference - his second since assuming top spot. Opinions on Powell’s policy bias is leaning more to the dovish side, but conventional wisdom has yet to settle in these early post-Yellen days.


Many observers don’t anticipate the Fed’s official policy statement to stray from the upbeat, hawkish tone on growth and employment as seen in the minutes to its May meeting when it kept rates on hold and in its May Beige Book, which noted rising retail price pressures.


“As hinted at in its minutes from its May FOMC meeting, the Fed may be ready to revise the forward-guidance language in its statement that states ‘federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,’” said Mickey Levy, chief US economist at Berenberg Bank.


“The Fed may either remove this phrase completely, or change it to reflect its projection that a 2020 policy rate of 3.4 percent, which is above its long-run 2.9 percent estimate, will be appropriate,” he said.


The Fed will also issue an updated ‘dot plot’ and Summary of Economic Projections (SEP), both of which will be scrutinized to see if the aforementioned uncertainties do force a change on the tightening trajectory for three to four rates this year, as well as well as forecasts on growth and inflation.


During their two-day meeting, the FOMC will absorb the latest Consumer and Producer Price Indices, out on Tuesday and Wednesday, respectively. 


US May CPI is expected to rise two-tenths of a percent in May for an annual rate of 2.7pct. Stripping out food and energy, the core reading is expected to rise to 2.2pct y/y from 2.1pct prior.


Joseph Lavorgna, chief economist at Natixis Bank, emphasize in his most recent research note entitled “Below the Surface, It’s a Tale of Two Inflation Rates”, that inflation has consistently undershot the Fed’s target since the last recession in June 2009.


“Since that time, the annual growth rate in the core CPI has averaged 1.8pct while the annual growth rate in the core PCE has averaged 1.7pct,” he said. “While the growth rate in core CPI has recently firmed, housing costs – rent of primary residence and owners’ equivalent rent – could slow going forward. This is based on our projection of increased residential home construction.”


He said monetary policymakers in the US sill have work to do in achieving its two-percent mandated target.


“For this to happen, goods deflation either has to moderate and/or services inflation needs to accelerate. This could be a tall task for the Fed,” he said.


Berenberg’s Levy expects the FOMC to raise its median 2018 and 2019 PCE inflation forecasts in the June SEP to 2.1pct from 1.9pct and 2pct, respectively. Levy looks for the 2020 median forecast to remain unchanged at 2.1pct, and the median core PCE inflation forecast to increase to 2pct from 1.9pct. 


“We forecast inflation to rise modestly higher than the Fed projects, which will place the Fed in an awkward situation if healthy economic growth and low unemployment are sustained,” he said.


Peter Boockvar, chief investment officer at Bleakley Advisory Group in Fairfield, NJ, is of the view that the Fed’s ‘so-called’ objectives are met, and that they should be at the end of the rate hike cycle with positive real rates, “not barely half-way through it.”


“Catch up is still the story but we know they are also tightening in another fashion via their balance sheet. There is a double form of tightening going on.,” he said.


Stephanie Sprague – LiveSquawk News


(Chart: St Louis Fed)
(Chart: St Louis Fed)
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