26.09.2016 |
- Fed FOMC: Ambiguous statement, voting dissent, median rate projections down
- So far, no significant Brexit effect on Euro Area business sentiment
- Russia: Growth remains lacklustre
USA: Fed FOMC: Ambiguous statement, voting dissent, median rate projections down
Last Wednesday, the federal open market committee (FOMC) decided to maintain the federal funds target range between 0.25 and 0.50 %. Most market participants had expected the Fed to remain on hold, while some analysts had anticipated an increase of 25 basis points.
The FOMC statement says that the labor market continued to strengthen and growth of economic activity picked up from the modest pace seen in the first half of this year (while the previous statement in July read: “has been expanding at a moderate rate”). Job gains have been solid. Household spending has been growing strongly but business fixed investment remained soft. The committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions strengthen “somewhat” further. Inflation is expected to rise to 2 % over the medium term as transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The committee further noted that “near-term risks to the economic outlook appear roughly balanced”, while previously it said that risks “have diminished”.
Ambiguous wording and voting dissent
With respect to the monetary policy decision, the statement reads: “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” The statement seems a bit vague: Either the case for an increase in the fed funds rate has strengthened and the FOMC acts accordingly (by increasing the fed funds rate), or it has not strengthened, in which case the FOMC would wait for further evidence.
The ambiguity increases when looking at the voting behavior: Seven members voted for ‘hold’, while three members (E. George, L. Mester and E. Rosengren) would have preferred to raise the range of the federal funds rate to 0.5 to 0.75 %. This is something very unusual as decisions are normally unanimous with few abstentions but mostly without dissenting votes.
Fed funds rate projections down
The September summary of economic projections (SEP) of the Federal Reserve Board members and Bank presidents shows a decline in the longer run real GDP median growth projection from 2.0 % (June projection) to 1.8 %. The longer run GDP growth rate is usually associated with the potential or steady-state growth rate of the economy. The median projection for the federal funds rate between 2016 and 2019 and the longer run decreased markedly compared to the June projected path (Figure 1). Now, the FOMC’s median estimate (the midpoint of the target range) of the federal funds rate is 0.6 % in 2016, 1.1 % for 2017, 1.9 % for 2018, 2.6 % for 2019 and 2.9 % in the longer run. This still implies one rate hike until year-end, one or two rate hikes next year, three steps in 2018 and three steps in 2019 (each 25 basis points).
The “balanced” risks to the Fed’s outlook, the compromise behind the ambiguous wording as well as the median 2016 projection seem to suggest a rate hike in December.
EUROZONE: So far, no significant Brexit effect on Euro Area business sentiment
The Eurozone flash composite purchase manager indexes (PMIs) for September came out gradually below expectations (Figure 2). The composite index keeps indicating a moderate expansion in economic activities printing at 52.6 after 52.9 last month (Bloomberg consensus forecast: 52.8). The manufacturing sub-index surprisingly increased from 51.7 to 52.6 (versus an expectation of 51.5), while the services PMI softened from 52.8 to 52.1 (expected: 52.8).
The German composite PMI indicator decreased from 53.3 to 52.7, while an increase was expected (53.6). The manufacturing component rose from 53.6 to 54.3 (versus an expected decline to 53.1). On the other side, the services PMI slowed from 51.7 to 50.6 (expectation: 52.1). The French results surprised on the upside: The composite PMI bounced from 51.9 to 53.3 amid rises in the manufacturing index (48.3 to 49.5) as well as the services index (52.3 to 54.1).
Overall, the September results of the PMI indicators are consistent with a moderate slowdown in Euro Area GDP growth in the second half of the year (compared to H1). However, the correction since the Brexit-referendum in June was soft (from 53.1 in May to 52.6 in September) and does not indicate large, immediate spillover-effects on business sentiment in the Eurozone.
CEE: Russia: Growth remains lacklustre
Russia’s monthly real activity indicators point to a lacklustre growth environment. In August, industrial production registered an annual increase of 0.7 % after -0.3 % in the previous month. Accordingly, the manufacturing PMI index has recently oscillated around the expansion threshold (50.8 in August), while the manufacturing survey of the Federal State Statistics Service (FSSS) has been recovering but recorded a slight drop in August.
Demand data was equally weak in August (Figure 3). Real wages dropped by 1 % due to weakening nominal wage growth. The real wage data of July was revised downwardly from 0.6 % (y/y) to -1.3 %. Real disposable income was down by 8.3 % (y/y) in August (after minus 7.3 % in July). Real retail sales decreased by -5.1 % in annual terms (after -5.2 % in the previous month). Car sales remained depressed in the last month (-18 % y/y). Meanwhile, the labor market was fairly stable with the unemployment rate falling from 5.3 to 5.2 % in August. Compared to last year, total employment had stagnated in July. Below the line, the August data mix keeps suggesting that Russia is leaving the recession but lacks growth drivers.