Fed signals likelihood of March rate lift-off, hawkish Powell keeps open options for rapid tightening
Yesterday’s FOMC statement made clear that Fed policy will “soon” be tightened, with rate lift-off likely at the next meeting on 16 March. And in his press conference, Jay Powell kept open all options for how quickly that tightening would proceed, with a much faster pace than previously anticipated by the markets not ruled out.
Indeed, Powell insisted that the Committee would be “nimble”. He repeatedly emphasised that economic conditions are now significantly different from those prevailing between the global financial crisis and the pandemic, with inflation too high, growth strong and the labour market likely to be highly resilient to several rate hikes. He also judged the inflation outlook to have deteriorated further since the Fed published its updated economic projections just last month, implying that the rate view presented in the dot-plots then was too conservative. And he was not perturbed by recent equity market turbulence – indeed, his comments seemed to validate it. While he insisted that the eventual pace of tightening will be data dependent, the possibility of hikes at every meeting this year, or even increments of 50bps, was not ruled out. So, it was no surprise that USTs sold off, the curve flattened, and equities fell in response to his remarks.
Alongside its statement, the FOMC also published new principles regarding its planned approach for reducing the size of the Fed balance sheet. These were relatively light on new information and offered no surprises. Among other things, however, the FOMC emphasised that changes in the target range for the federal funds rate will be its primary means of adjusting the stance of monetary policy with its bond holdings to be reduced over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments. Quantitative tightening will thus be a secondary process that the Fed will hope will run in the background without disturbing markets or grabbing much attention. Powell suggested that the Committee would likely require at least two more meetings to agree the pace and nature of QT, suggesting that it is unlikely to start before late spring or early summer. But, as for rate hikes, he also intimated that the pace at which those bond holdings will be reduced will be faster than after the global financial crisis.
Please see the assessment of Daiwa America’s Mike Moran here for further discussion of yesterday’s Fed communication.
German consumer confidence slightly improved at the start of the year
After business survey indicators – including the flash PMIs and ifo indices – signalled an improvement in German firms’ expectations of the near-term economic outlook, today’s German GfK consumer confidence survey similarly suggested some stabilisation in conditions in the euro area’s largest member state at the start of the year. Indeed, having fallen sharply in December to the lowest level since April, the index of consumer expectations about the economic outlook rose for the first month in three in January, by 5.7pts to 22.8, albeit still some 36pts lower than the summer peak. Households were more upbeat about their income expectations too, with the index similarly rising for the first time since September. And so consumers’ willingness to buy also improved in January having plunged to an eleven-month low in December. Admittedly, the relevant index still remains considerably lower than the average over the past year. And with households still concerned about near-term inflation and the number of new coronavirus cases still on the rise, we would expect only a moderate recovery in spending rather than a sudden jump over the near term. Indeed, GfK reported only a modest increase in the headline sentiment indicator in February, by 0.2pt to -6.7.
The German consumer survey contrasted with yesterday’s French INSEE survey, which suggested that consumers were less willing to spend at the start of the year. The headline sentiment indicator fell just 1pt in January to 99, only a touch below the long-run average, above November’s level and just 4pts below the summer peak. And concerns about unemployment remained stable. But the share of households considering it to be an appropriate time to make major purchases fell to a fourteen-month low, to be back below its long-run average, perhaps in part reflecting elevated concerns about inflation as well as the current wave of pandemic.
UK retail survey to suggest relatively subdued growth in sales at the start of 2022
Today’s UK data flow will focus on the CBI’s latest distributive trades survey for January. After Friday’s official retail sales figures reported a significantly weaker-than-expected outturn in December, high-frequency data suggest that travel for retail and shopping centre footfall has remained subdued at the start of the year. And so, while the CBI survey might well suggest that sales remained above their level a year earlier (when the UK was operating under more stringent pandemic restrictions), it seems unlikely to signal a significant rebound in sales in January.
US Q4 GDP estimate to confirm another quarter of above-potential growth buoyed by inventories
Today brings the first estimate of US Q4 GDP. Ahead of this week’s economic releases, the consensus forecast was close to 5½%Q/Q annualised, up from 2.3% growth in Q3. That would take GDP about 2.7% above the pre-pandemic level in Q419 but would leave it still a little more than 1% below the pre-Covid trend. But while yesterday’s advance goods trade numbers suggested that net exports were a drag on growth, there was a big upside surprise to wholesale and retail inventories numbers. So, while final demand is unlikely to have been markedly above-potential, stock-building looks to have made a very substantive contribution to economic growth in Q4, and poses upside risks to the consensus forecast. Today’s other releases from the US include the advance durable goods orders and pending home sales numbers for December, the Kansas City Fed manufacturing activity indicator for January, and the usual weekly claims figures.