Overview:
On Wednesday night at 20:15 CET the Federal Open Market Committee (FOMC) will announce its policy rate decision. In line with the market we expect the FOMC to keep policy rates unchanged at 2.00%. Focus will be on how much the committee will toughen its language. We expect the FOMC to adopt a rela-tively neutral stance, possibly with a slight weighing towards inflation concerns. Markets are currently pric-ing more than 50% probability of one or several hikes by September. We doubt that the statement will be sufficiently tough to ratify such a pricing. Hence, going into the meeting we asses risks to bond yields - par-ticularly in the short end - to be skewed to the downside.
Activity:
Since the 30 April meeting risks of a deeper downturn have abated somewhat. Firstly, financial markets have stabilised, although significant strains remain. Secondly, activity data have not deteriorated as much as feared - partly owing to a quick impact from the tax rebates. That said the activity outlook remains sluggish, as headwinds from tighter credit, rising commodity prices and the housing downturn remain in the equation. The statement is likely to acknowledge improvement in financial market conditions and less down-side risks to growth. That said, the weaker labour market, tighter credit conditions, the housing correction and the rising commodity prices will be mentioned as downside risk factors.
Inflation:
While core inflation data have shown a slightly more favourable development over the past months, there are few signs of an easing in the underlying trend. Moreover, the lack of response in global commodity markets is adding concern that the US slowdown is not able to generate any persistent easing in headline in-flation through a slowdown in commodity prices. This is now adding upside risk to inflation expectations, which by some measures have recently shown signs of de-anchoring leading to increased concern among many FOMC members. While the overall outlook for inflation will probably be little changed, the FOMC is ex-pected to add further emphasis to its inflation concerns.
On Wednesday night at 20:15 CET the Federal Open Market Committee (FOMC) will announce its policy rate decision. In line with the market we expect the FOMC to keep policy rates unchanged at 2.00%. Focus will be on how much the committee will toughen its language. We expect the FOMC to adopt a rela-tively neutral stance, possibly with a slight weighing towards inflation concerns. Markets are currently pric-ing more than 50% probability of one or several hikes by September. We doubt that the statement will be sufficiently tough to ratify such a pricing. Hence, going into the meeting we asses risks to bond yields - par-ticularly in the short end - to be skewed to the downside.
Activity:
Since the 30 April meeting risks of a deeper downturn have abated somewhat. Firstly, financial markets have stabilised, although significant strains remain. Secondly, activity data have not deteriorated as much as feared - partly owing to a quick impact from the tax rebates. That said the activity outlook remains sluggish, as headwinds from tighter credit, rising commodity prices and the housing downturn remain in the equation. The statement is likely to acknowledge improvement in financial market conditions and less down-side risks to growth. That said, the weaker labour market, tighter credit conditions, the housing correction and the rising commodity prices will be mentioned as downside risk factors.
Inflation:
While core inflation data have shown a slightly more favourable development over the past months, there are few signs of an easing in the underlying trend. Moreover, the lack of response in global commodity markets is adding concern that the US slowdown is not able to generate any persistent easing in headline in-flation through a slowdown in commodity prices. This is now adding upside risk to inflation expectations, which by some measures have recently shown signs of de-anchoring leading to increased concern among many FOMC members. While the overall outlook for inflation will probably be little changed, the FOMC is ex-pected to add further emphasis to its inflation concerns.