Daily Insight Fed maintains outlook
Group Economics Macro & Financial Markets Research Nick Kounis & Arjen van Dijkhuizen + 31 20 343 5616
30 April 2015
Despite weak first quarter, Fed sticks to its outlook for economy, unemployment and inflation We think economy will firm in the coming months setting scene for a hike later in the year China unlikely to adopt full-fledged QE, given room for easing under conventional instruments
Fed recognises weakness…
We do not expect China to adopt unconventional ‘QE’ …
The FOMC did not make major changes in its view of the
Market speculation has grown recently about the possibility of
outlook for the US economy, unemployment and inflation
the PBoC following other major central banks in launching
despite the terrible Q1 GDP data. It certainly recognised the
unconventional QE policies. This would come in the form of the
broad-based weakness over recent months saying that
PBoC buying local government bonds directly. Some
‘economic growth slowed during the winter months’ and the
connected this to the CNY 1tn local government debt swap
‘pace of job gains moderated’. However, this was attributed ‘in
programme announced in March. We believe that China will
part’ to ‘ transitory factors’. As such, the forward looking
continue to add further stimulus to keep economic growth
elements in the statement were unchanged.
around its 7% target for 2015, but do not think that China needs to implement such unconventional policies at this stage.
…but maintains outlook Indeed, the Fed maintained its view of the outlook. It asserted
… given room for easing under conventional instruments
that ‘although growth in output and employment slowed during
Our view is not only based on the PBoC’s denial that it was
the first quarter, the Committee continues to expect that, with
considering QE. We feel there is plenty of room for more
appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate’.
easing using conventional instruments. First, banks’ reserve requirements (RRRs) were cut by in total by 150 bps recently, also reflecting capital outflows turning negative, but at 18.5%, they remain high by international standards. We expect further RRR cuts to add more liquidity to the banking system. Second, despite a cumulative 75 bp cut in recent months, the main
Hike dependent on progress towards its mandate
policy rate (5.35%) is still high compared to current inflation
It also repeated the rather vague conditions that would need to
levels (around 1.5% yoy), leaving room for further cuts. Third,
be met before its policy rate starts to go up. In particular, it
the benchmark deposit rate is currently 2.5%, so there is no
asserted that ‘the Committee anticipates that it will be
‘zero bound’ issue. Fourth, the authorities can use specific
appropriate to raise the target range for the federal funds rate
lending instruments targeting banks and can even stimulate
when it has seen further improvement in the labor market and
banks to buy local government bonds. Last but not least, there
is reasonably confident that inflation will move back to its 2
is room for a weaker exchange to support exports and inflate
percent objective over the medium term’.
the economy.
Rebound should set scene for September hike A lot will obviously depend on whether the economy recovers convincingly after the weak first quarter. Data earlier in the day showed that GDP growth slowed to just 0.2%, even weaker than the consensus forecast of 1%, and following 2.2% in Q4. The slowdown was driven by weaker consumer spending, as well as fixed investment. We expect both to recover. Consumer demand in particular should catch up with gains in disposable income due to the fall in oil prices, as well as ongoing strength in the labour market. A stronger economy should set the scene for a rate hike later in the year, with September remaining most likely in our view.