The U.S. Dollar picked up slightly after the FOMC minutes were released yesterday, but the rally didn’t last. For the fourth time in 18 months, in June the Fed increased the federal funds rate by 25 basis points with the target range now between 1% and 1.25%. The American Central Bank is expecting to implement another rate hike before the end of the year. In 2018 the main rate should therefore reach around 2.1%, and 2.9% in 2019.
As discussed in our previous analysis, a priority for the FOMC is reducing the Central Bank’s balance sheet, after its large-scale purchases of U.S. bonds in the wake of the financial crisis. This could significantly affect the value of the greenback.
In October 2014, the Fed decided to end its Quantitative Easing programme after running up a deficit of USD 4.5 trillion. FOMC members said that they intend to reduce the Federal Reserve's securities holdings to reduce the supply of reserve balances, but there are still divided about when to begin. They explained that they would decrease the “reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps”. This balance sheet normalisation plan should be implemented this year if the Fed decides that the American economy is evolving as anticipated.
Lower Inflation Expected
As we can read in the Fed’s minutes: the staff’s forecast for consumer price inflation, measured by the change in the PCE price index, was revised down slightly for 2017 because of weaker than expected inflation data.
Uncertainty Surrounds Growth Forecast
Real GDP increased by 1.4 % y/y during Q1 2017, according to the final estimate, compared to 2.1% in the last quarter of 2016, as shown on the chart.
As discussed in our previous analysis, a priority for the FOMC is reducing the Central Bank’s balance sheet, after its large-scale purchases of U.S. bonds in the wake of the financial crisis. This could significantly affect the value of the greenback.
In October 2014, the Fed decided to end its Quantitative Easing programme after running up a deficit of USD 4.5 trillion. FOMC members said that they intend to reduce the Federal Reserve's securities holdings to reduce the supply of reserve balances, but there are still divided about when to begin. They explained that they would decrease the “reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps”. This balance sheet normalisation plan should be implemented this year if the Fed decides that the American economy is evolving as anticipated.
Lower Inflation Expected
As we can read in the Fed’s minutes: the staff’s forecast for consumer price inflation, measured by the change in the PCE price index, was revised down slightly for 2017 because of weaker than expected inflation data.
Uncertainty Surrounds Growth Forecast
Real GDP increased by 1.4 % y/y during Q1 2017, according to the final estimate, compared to 2.1% in the last quarter of 2016, as shown on the chart.
FOMC members are unsure about the prospects for growth, as their current figures were based on the assumption that U.S. fiscal policy would be more expansionary in the coming years. However, as it was recently highlighted by the IMF, President Trump’s plan aren’t detailed enough to be factored into forecasts: “The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritise public spending, and to revamp the tax system but […] it became evident that many details about these plans are still undecided”.
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