Yesterday’s FOMC meeting produced the right result: Fed officials indicated that the future path of rate hikes will be shallow. As noted in previous commentaries, this was more important than the question of whether to hike in September or December. The median projection for the Fed funds rate for the end of 2017 has been chopped by 50 basis points to 1.1%. This is consistent with the view that the unemployment-inflation trade-off in the US has changed.
The hawks made their point, however, that the economy has not slowed materially. The strong rise in the median income, particularly for households in the lowest quintile, suggests the doves are underestimating the improvement in wages. Nevertheless, this economic recovery is different from previous cycles. Bank lending remains under control. The strong pace of innovation is putting huge pressure on established companies, disrupting old business models and producing significant cost savings. Rates may go up in December, but the Fed is prioritising growth.
Summary:
- Shallow pace of US hikes increases risk of Yen spike
- Yesterday’s BoJ policy announcement still correct
- Negative rates (to stop the Yen rising) not the answer for Japan: non-manufacturing will drive job creation
