23 Dec 2015
When will the Fed deliver the second hike? - SocGen
FXStreet (Delhi) – Aneta Markowska, Research Analyst at Societe Generale, suggests that the FOMC’s median dot implies four hikes next year, or roughly one per quarter.
Key Quotes
“In order to deliver on this forecast, the FOMC needs to see confirmation that economic performance is evolving in line with expectations. Since the unemployment rate is very close to the Fed’s objective and its forecast looks easily achievable, the hurdle is squarely on the inflation side of the Fed’s mandate.”
“So what does the Fed need on the inflation side? First, the FOMC believes that seeing above-trend growth and continuing tightness in the labor market will help them achieve the inflation objective. The FOMC expect core PCE to end the year at 1.3% (current level), to rise to 1.6% by the end of 2017 and to reach 2.0% by 2018. Its forecasts for headline PCE inflation are 0.4%, 1.6% for 2016 and 2017, and converge to core inflation thereafter. If this path is confirmed by the data, it is good enough for a hike a quarter.”
“What would cause the Fed to pause? In Chair Yellen’s words: if we “find that the underlying theory is not bearing out, that [inflation] is not behaving in the manner that we expect, and that it doesn't look like the shortfall is transitory and disappearing with tighter labor markets, that would certainly give us pause.” So, for the Fed to diverge from the roughly one hike per quarter pace, inflation would have to disappoint relative to its forecast.”
“Importantly, inflation does not have to rise rapidly or reach 2% before the next hike is delivered. It simply needs to rise in line with the Fed’s forecast. Given the FOMC’s very benign forecast for PCE inflation, we view the hurdle as relatively low and thus assume that the next hike will be delivered at the March meeting.”
Key Quotes
“In order to deliver on this forecast, the FOMC needs to see confirmation that economic performance is evolving in line with expectations. Since the unemployment rate is very close to the Fed’s objective and its forecast looks easily achievable, the hurdle is squarely on the inflation side of the Fed’s mandate.”
“So what does the Fed need on the inflation side? First, the FOMC believes that seeing above-trend growth and continuing tightness in the labor market will help them achieve the inflation objective. The FOMC expect core PCE to end the year at 1.3% (current level), to rise to 1.6% by the end of 2017 and to reach 2.0% by 2018. Its forecasts for headline PCE inflation are 0.4%, 1.6% for 2016 and 2017, and converge to core inflation thereafter. If this path is confirmed by the data, it is good enough for a hike a quarter.”
“What would cause the Fed to pause? In Chair Yellen’s words: if we “find that the underlying theory is not bearing out, that [inflation] is not behaving in the manner that we expect, and that it doesn't look like the shortfall is transitory and disappearing with tighter labor markets, that would certainly give us pause.” So, for the Fed to diverge from the roughly one hike per quarter pace, inflation would have to disappoint relative to its forecast.”
“Importantly, inflation does not have to rise rapidly or reach 2% before the next hike is delivered. It simply needs to rise in line with the Fed’s forecast. Given the FOMC’s very benign forecast for PCE inflation, we view the hurdle as relatively low and thus assume that the next hike will be delivered at the March meeting.”