FOMC Preview

June 17, 2014

In the seven weeks since the last FOMC meeting at end-April, geopolitical tension have lifted the price of West Texas Intermediate crude oil by 7.4%.  The dollar has appreciated 2.4% against the euro but is essentially flat relative to the yen.  On balance, 10-year Treasuries and the Dow Jones Industrials likewise hardly changed on net.  ECB policy was eased early this month in a number of ways.  Opinion was split over whether enough support was provided for Euroland’s depressed economy, and criticism has been universal that ECB officials waited too long to act.

The FOMC Statement will be released Wednesday at 14:00 EDT (18:00 GMT) and accompanied by new projections for macroeconomic trends and when the fed funds rate’s future path.  Chairwoman Yellen will conduct a one-hour press conference beginning 30 minutes later.  The last press conference and release of forecasts happened on March 19.  Back then, projected growth was revised marginally lower.  Core inflation measured by the personal consumption price deflator was forecast in an unchanged range of 1.5-2.0% next year and 1.7-2.0% in 2017.  The jobless rate is forecast at 5.2-5.6% in 2016, in line with but not below its longer run tendency.  All but one committee member expect the federal funds rate to remain unchanged all this year; the end-2015 and end-2016 levels had a median projection of 1.0% and 2.25%, respectively.

The memorable comment from Yellen on March 19 was a hint that the first fed funds rate hike might happen around a half year after the program of quantitative easing, which continues to be scaled down in increments of $10 billion a meeting, is fully phased out.  That would be a little less than a year from now.  Yellen elaborated on a wide range of labor market indicators that she is watching closely and said officials would need to be satisfied with the improvement of the labor market and that inflation is moving upward before anything is done on interest rates.

Minutes from the April 29-30 meeting of the FOMC revealed that members had discussed options for policy normalization, noted improvement in consumer and business confidence, foresaw strengthening foreign demand, predicted sub-2% inflation over the next couple of years, identified slack labor and product markets, and agreed to act gradually during the eventual normalization of policy.

U.S. data highlights since the end-April meeting include a downward revision of first-quarter growth to negative 1.0%.  Nominal GDP only edged up 0.3% that quarter, and real GDP over the past year and a half has averaged just 1.6% per annum.  On the other hand, non-farm payroll employment rose at least 200K in each of the four months to May, the first such streak of four months since October 1999 – January 2001.  Jobs increased 241K per month in the latest four months.  The manufacturing purchasing managers survey of 55.4 in May and the services PMI of 56.3 were each robust and above the April readings.  May industrial production, +0.6%, grew faster than expected.  But retail sales fell shy of forecasts, and measures of consumer sentiment were mixed.  The trade deficit has grown progressively from $35.9 billion last November to $37.4 billion in December, $40.1 billion in January, $42.6 billion in February, $44.2 billion in March and $47.2 billion in April.  In short, the data have been all over the map, and the experts are divided over the strength of the economy through the balance of 2014.  CPI inflation had a two-handle in May for both all items (2.1%) and core (2.0%), but the core personal consumption price deflator in April was only 1.4%.

Another no less meaningful change since the last FOMC meeting is the recent confirmation of nominees for the Board of Governors, including Stanley Fisher as Fed Vice Chairman.  As a professor at MIT, Fisher mentored both ECB president Draghi and Yellen’s predecessor Ben Bernanke. 

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3096 82.76 2.08 13044 106.34
04/25/12 1.3226 81.37 1.97 13096 104.13
06/20/12 1.2693 79.28 1.66 12837 83.63
08/01/12 1.2300 78.10 1.49 13028 88.98
09/13/12 1.2895 77.43 1.72 13342 97.60
10/24/12 1.2948 79.75 1.77 13115 85.72
12/12/12 1.3082 83.24 1.70 13325 87.13
01/30/13 1.3584 91.16 2.02 13949 97.63
03/20/13 1.2948 95.65 1.94 14497 92.82
05/01/13 1.3195 97.48 1.62 14740 90.47
06/19/13 1.3364 95.76 2.23 15304 98.38
07/31/13 1.3301 97.92 2.67 15565 105.63
09/18/13 1.3363 98.28 2.76 15606 107.01
10/30/13 1.3764 98.18 2.48 15660 97.42
12/18/13 1.3696 103.81 2.89 16198 98.06
01/29/14 1.3651 102.13 2.73 15719 97.23
03/19/14 1.3918 101.75 2.71 16335 99.96
04/30/14 1.3868 102.11 2.66 16553 99.52
06/17/14 1.3541 102.17 2.64 16719 106.91

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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