Daily Commentary BY THE CURVE TEAM –

How Far Could The Fed Go?

22nd of March, 2018

The FOMC elected to lift the Fed Funds Rate overnight which drew a mixed reaction from markets. The outcome was largely anticipated, however some key revisions indicate that the central bank is leaning towards more hikes than previously anticipated.

Rates were lifted another 25bps in the first meeting of the FOMC under new chair Jerome Powell. The decision was an unanimous 8-0 with the post meeting statement indicating “The economic outlook has strengthened in recent months,” with conditions warranting “further gradual adjustments in the stance of monetary policy.”

This US economy has experienced a sound recovery over the past 12 months in terms of economic growth and employment conditions. Hence, despite the relatively weak retail sales figures for the last quarter, growth estimates have risen for the rest of this year and 2019.

Powell highlighted this optimism in a post meeting press conference, indicating that “2.7% might be the median but it doesn’t say what we think is possible.

Where the key lies however is in the dot plots.

Looking back to the December meeting of the FOMC, the consensus around the path for interest rates was fairly mixed. Particularly, while sentiment leant towards rates being above 2.00% for 2018, there were still 6 members under this level.

The latest dot plots indicated a shift in sentiment amongst members. As per the most recent meeting, there are now only 2 sitting below the 2.00% mark.

This implies if the economy continues to hum along and employment conditions continue to tighten, there is not much lying between the Fed and further three hikes this year.

The result takes the interest rate differential between the Fed Funds Rate and the RBA Cash Rate into negative territory for the first time since 2000. The result will have the RBA watching intently over the course of this year as there is no indication that they will be moving rates any time soon. The big thing to watch will be the currency, and while there have not been any substantial movements as of yet, a lower AUD has been repeatedly cited as beneficial to the economy.

Quickly offshore and wages data out of the UK came in stronger than expected leading into the central bank meeting today.

Highlight today domestically will be the labour force data where a small lift in employment is expected.

Oliver Parsons

Client Relationship Manager