Daily Commentary BY THE CURVE TEAM –

FOMC Hikes On Outlook

15th of June, 2017

Interest rate normalisation in the US continued overnight with the FOMC lifting the Fed funds rate target a further 0.25%. The move was widely expected by the market and continues to be driven by the medium term outlook for employment and inflation. 

The FOMC remains focused on where the US economy is going and not where it is right now, with Chairman Janet Yellen going to great lengths to outline the temporary factors in play at present. The FOMC outlook was also unchanged despite recent weakness in the data with another hike still expected later this year with multiple hikes still slated for 2018.

The next phase of monetary policy normalisation, the unwinding of the Fed’s bloated balance sheet as a result of Quantitative Easing, was also discussed at length. A plan to reduce the size of the balance sheet was outlined in detail. The FOMC will start out with small monthly reductions that will slowly build until the desired run off rate is achieved.

The move to hike in June came the same day that a double dose of weak data was released. Retail sales in the US overnight undershot expectations across all key measures while the latest monthly inflation number was actually negative. While the FOMC is still committed to its current path, how incoming data evolves relative to their expectations will be key to the timing of moves going forward. 

Interest rates were also a key topic in Australia yesterday. The release of the latest consumer survey saw another fall in consumer confidence with pessimists now clearly outweighing optimists. While consumers are still downbeat about their own finances, the soft read on GDP for Q1 has seen economic expectations take a hit in the latest survey.

One key point to note from the survey was news recall. The third most recalled news item over the month behind ‘economic conditions’ and ‘budget and taxation’ was on interest rates. In March, consumer’s views around interest rates were only slightly negative, while the June reading was the most unfavourable since June 2008. Media coverage around interest rate hikes as a result of the regulators increasing lending are clearly having an impact on consumer sentiment.

The one saving grace for consumers could be the strength of the employment market and the prospects for further strength over the months ahead according to the leading indicators. We will get the latest update on employment today when the ABS releases their latest survey results.

David Flanagan

Director - Interest Rate Markets