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This wednesday the Federal Reserve decided to maintain policy unchanged, as universally expected by the markets. The statement delivered only a few changes compared to the June statement. Of relevance, there was no specific mention of #Brexit outside of the typical “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.” The risk of a December 2016 hike taking place increased to 52.6% ex-post the meeting –from 47.4% ex-ante the meeting.
Governor Esther George decided to dissent in this meeting, voting instead for a +25bps increase in the Federal Funds Rate. Also of relevance, this statement mentioned that market-based inflation expectations had “remained low”, compared to the prior one, where the Fed mentioned that market-based inflation expectations had “declined”.
The outcome of this meeting does not alter our view on the likely future Fed actions. As we have argued many times in prior documents, we are convinced that the FOMC really wants to normalize policy as soon as possible. That said, there is a large difference between wishing to do something and being able to do so. We believe that the forthcoming fundamental data out of the US will underwhelm expectations. Among others, (1) we are concerned about the capacity of durable good sales to continue performing well going forward, (2) we are doubtful about the capacity of credit growth to accelerate going into the future, (3) we believe that employment growth will disappoint during the second half of the year, and (4) we are becoming increasingly concerned about the latest performance that the leading indicators index has shown –now showing a sub 1% y/y rate of increase.
Also as argued in the past, we continue to think that the US economy is NOT strong enough as to be able to advance unscathed in the middle of this –arguably—very difficult international environment. We consider that we have not yet seen the effect of #Brexit on world fundamental data, and we believe that additional USD strength places at risk the capacity of the SPX to perform to investor expectations (a development that could carry financial stability connotations). Among others, we find it hard to forecast that business investment can grow if corporate profits continue to fall.
We reiterate our view that circumstances will likely force to Fed to keep policy unchanged going into 2017, and likely even going into 2018.
Alberto Bernal
