Economics & Market Updates

US: FOMC MAINTAINS STATUS QUO ON FUTURE RATE EXPECTATIONS

In line with expectations, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points to between 0.75% and 1% at its meeting held on 15th March 2017. The rate hike was warranted by strengthening of economic activity, especially the labor market and inflation (Core PCE) which has steadily edged closer to the FOMC’s 2% target. While the markets had expected indications of a faster pace of rate increase, the Fed has maintained status quo on policy rate expectations and has also decided to continue reinvesting principal payments from its holdings of debt and mortgage-backed securities. Given stability across high-frequency indicators, the balance of risk will tilt towards a faster pace of rate increase, especially if expansionary fiscal policies are undertaken by the new administration.

With regards to economic indicators, the personal consumption expenditure (PCE) has risen steadily in recent months with core PCE closer to reaching the inflation target of 2%. The unemployment rate has remained stable at 4.7% and was accompanied by a significant uptick in job creation averaging 209 thousand on a trend basis. In addition, average hourly earnings continued to rise and came in at 2.8% y-o-y in February 2017 compared to 2.6% y-o-y in January 2017.

Further, improvements in retail sales, house prices, consumer and business sentiment on a trend basis reflect that consumption and investment activity have continued to firm up. Overall, the monetary policy stance of the FOMC remains accommodative and will further support labor market conditions and a return to the inflation target of 2%. We expect the Federal Funds rate to be around 1.5% by the end of 2017.

 

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