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Our Blog

The FOMC's conundrum

29 February 2016
US
If it was just about latest wage and inflation data the FOMC would be tightening in March.  Both are clearly trending higher with the Committee's preferred measure of inflation, the core personal consumption expenditure (PCE) deflator, now also heading upwards.   A larger than expected rise in January took the annual rate of increase to 1.7%.  The latest FOMC Summary of Economic Projections didn’t expect core PCE inflation to reach 2.0% until 2018.

But it’s never that simple.  The question for the FOMC is where inflation is going, the answer to which is becoming increasingly complex.  Indeed the FOMCs January statement showed the Committee was clearly struggling with the implications of the recent heightened market volatility for US and global growth.  Also the full impact of the recent strength in the USD on the economy is yet to be determined.
 
Our read of the recent activity data is that it hasn’t been that bad.  Where there have been weaker signals, such as consumer confidence and the non-manufacturing PMI, they can be tied back to market volatility, the weather and the fallout from lower oil prices.
 
We started the year thinking US GDP growth would come in around the top of its recent 2.0-2.5% range.  It’s now more likely to come in around the bottom of that range, still dependent on continued labour market expansion and solid increase in aggregate labour income.  Importantly that will still have the US economy growth at a little above potential which the Congressional Budget Office has averaging 1.8% over the 2016-2020 period.
 
If we’re right and growth continues to run ahead of potential the unemployment rate can be expected to continue to fall, absent a rise in the participation rate, and wages and inflation continue to trend higher. Until that becomes clear and the FOMC has more confidence in that story, the Committee will sit on their hands.  
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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