Fed meeting. We are preparing for important statements and strong movements. The US Federal Reserve left the key rate unchanged in June. ECB meeting and QE tapering

According to the forecast of the analytical company CME Group, at a meeting on June 13-14, the US Federal Reserve will again raise the key rate - for the third time in a row in seven months. Experts estimate the probability of this to be 99.6%.

In addition, economists expect that the regulator will make at least one more rate increase before the end of the calendar year.

Low inflation figures and relatively weak growth in the first quarter of 2017 will not change the US Central Bank's view that raising rates is reasonable given the low unemployment rate. Also, following the two-day meeting, updated economic forecasts will be published, and the Fed Chairman will hold a press conference.

“I think they are going to raise rates and continue to stick with the current course"says Moody's Analytics economist Ryan Sweet.

Previously, Fed officials said they were not concerned about the strength of the economy. The regulator considers weak growth in the first quarter to be temporary and believes that inflation will continue to move towards reaching the target of 2%, Marketwatch reports.

A member of the Federal Reserve's Monetary Policy Committee (FOMC) noted in a recent speech that

inflation has been below target for the past five years, so there is “no point” in losing patience and waiting for it to accelerate immediately,

quotes the politician The Economic Times.

On June 14, May reports on the dynamics of consumer prices and retail sales will be published, but these data are unlikely to affect the rate increase in June. However, if the results turn out to be significantly weaker than expected, this could jeopardize a rate hike in September and potentially change the tone of the Fed's statement, said UBS economist Seth Carpenter.

Experts express a much less consistent position regarding the Fed’s plans to reduce the volume of Treasury and mortgage bonds on its balance sheet, the value of which now exceeds $4.5 trillion.

The main question is when can the reduction begin, in September or December? Analysts are set to assess whether the Fed will change the language of its policy statement about plans to maintain its balance sheet "until the federal funds rate is normalized." If the Fed says normalization is “full steam ahead,” that would be a “clear marker” that balance sheet contraction will begin as early as September, Seth Carpenter said.

The president of the Federal Reserve Bank of Philadelphia spoke about the possibility of reducing the volume of bonds on the balance sheet in January, who considered the key point to be an increase in the base interest rate to 1% (since March it has been in the range of 0.75-1%). However, most economists do not expect such drastic changes in the regulator’s plans and expect the reduction to start in December. In any case, experts are confident that Fed Chairman Janet Yellen will begin a reduction program before the end of her term at the beginning of next year, writes CNBC.

Economists believe the Fed will make another rate hike this year and three times in 2018, bringing the federal funds rate to 2.1% by the end of 2018.

However, there are doubts in the market about an increase in the base rate at the September meeting: the probability of this is now estimated at only 23%.

UBS believes that the probability of a twofold rate increase during 2019 (and, accordingly, the absence of further increases in 2017) is 40%.

A number of experts believe that

The rate hike in September will be prevented by another achievement of the US government debt ceiling, which could be frozen at $20 trillion.

On Monday, June 12, US Treasury Secretary Stephen spoke about this problem. “If for some reason Congress does not act before August, we will be able to use contingency plans to fund the government. So I want to make it clear that the time frame will not pose a major problem. However, the markets do not want to wait for us, and the problem of government debt should be solved now,” Mnuchin said.

This is not surprising, since the future prospects for monetary policy in the United States are especially important now.

The event will contain a number of points that investors should pay attention to. At 21:00 Moscow time, the regulator's statement will be published and updated forecasts by the Open Market Committee (FOMC) will be presented. At 21:30 Moscow time there will be a press conference by Jerome Powell. Now speeches by the head of the Federal Reserve are held after each meeting, and not four times a year, which is aimed at improving communication between the Federal Reserve and market participants.

Main settings

This time it is assumed that the key rate will be left unchanged at 2.25-2.5%. What is important is to look to the future—an assessment of the prospects for monetary policy in the United States. With a high degree of probability, market participants expect a reduction in the key rate this year.

In addition, in May the “QE in reverse” program began to be wound down, which was a way to reduce the Fed’s balance sheet, and therefore a measure of monetary tightening. The program is due to be completed at the end of September. From October, part of the funds received from expired mortgage securities will be used to purchase US government bonds, which will play in favor of lowering market interest rates.

In detail

. General state of the economy— in early May, the Fed assessed growth as “solid” after an earlier indication of a slowdown. In the first quarter, US GDP increased 3.1% (q/q). However, a more consistent slowdown is possible in the future due to increased protectionism and problems in the global economy. According to the forecast of the Atlanta Fed, known for the most recent estimates within the GDPNow service, GDP growth is expected to be 2.1% for the second quarter.

The US economy is in a late stage of the economic cycle. noticeably inverted (upside down) in the middle segment. Over a period of up to 10 years, we are talking about an inversion of over 80%. This may be a signal preceding a recession in the US with a time lag of 1-2 years.

. Labor market— perhaps one of the main factors that the Fed focuses on. The key report on the US labor market for May supported increased expectations of a Fed rate cut. Number of non-agricultural employees sector (non-farm payrolls) increased by only 75 thousand. At the same time, +200 thousand is considered normal for a strong labor market. These are monthly data, but the beginning of negative trends is possible.

. Inflation. In a statement published following the previous meeting, the regulator said that inflation would most likely remain around the 2% target. However, the reality may be different. In April, the regulator's favorite indicator, the PCE Price Index, showed growth of 1.5% per annum, and the basic version of the index (excluding food and energy) increased by 1.6%. More recent data - in May, consumer inflation (CPI) amounted to 1.8% per annum compared to 2% in April, while manufacturer inflation also slowed.

Previously, the Federal Reserve pointed to stability in long-term inflation expectations, despite the growing public debt, which exceeded $22 trillion. According to the segment of inflation-protected bonds (TIPS), inflation expectations in the United States for the next 5 years are 1.85% per annum. Back in September, 2.3% were observed. However, then inflation expectations sank along with oil prices, as well as due to general economic risks.

. The influence of the dollar. The Dollar Index (DXY) has been consolidating in recent months. Last year, the dollar bounced from multi-year lows, and many US corporations pointed to changes in currency rates that were unfavorable to their financial results. I note the high spreads between the yields of US and German government bonds. The eurozone economy is unbalanced, and the yields on short and medium-term issues of many government bonds in the region are negative, which plays in favor of strengthening the dollar against the euro. Also, the growth of the American may be facilitated by exiting risks in the event of increased turbulence on financial markets. So the Fed is better off trying to keep the US stock market from collapsing.

Dollar index chart since 2016, weekly timeframe

. Risk assessment. At the beginning of the year, the Fed removed the language about balancing risks for the prospects for the development of the American economy. The regulator notes the global economic and financial situation. We are talking primarily about the slowdown in the global economy, which is clearly visible in the graphs of industrial indices of business activity in the eurozone and China. The deterioration of the terms of foreign trade has hit many countries, in particular Germany. For the second quarter, the Bundesbank predicts a slight decline in the German economy. The Federal Reserve will evaluate current and projected economic conditions in the United States, focusing on employment and inflation targets, data from financial markets and “from abroad.”

Monetary Policy Forecast

Attention - to the Fed statement, FOMC digital forecasts and the subsequent speech of Jerome Powell. Previously, the head of the regulator promised to stimulate the American economy if necessary.

According to the March forecast, for 2019 the FOMC planned to keep the key rate unchanged at 2.25-2.5%. According to the derivatives segment (CME FedWatch service), market participants are highly likely to expect three stages of rate cuts of 0.25 percentage points before the end of the year, the next one could take place as early as July. We are waiting for the regulator’s new forecast based on the results of this meeting.

More than 50% of American citizens invest in stocks, including retirement savings, so a strong drawdown in the US market could have an adverse economic effect. This forces the Fed to monitor financial conditions. In previous years, the Federal Reserve informally supported the American stock market during crashes, softening the rhetoric and thereby completing the correction. Something like this happened this time too. One of the factors behind the rally since the beginning of the year is the decline in expectations for monetary tightening by global central banks.

This time the risks are greater and more aggressive measures may be required. Apparently, this year the rate will indeed be reduced. In my opinion, this time the FOMC median forecast will assume one stage of decline before the end of the year. The Fed may prefer to wait for the release of fresh macro information and developments in the US-China trade confrontation. If necessary, the FOMC will adjust the forecast as early as September.

There may be some volatility on Wednesday evening. If the regulator disappoints investors with a more restrained forecast than the market expects, then American stocks may resume their correction. There will also be a factor in favor of strengthening the dollar. It is obvious that the Fed’s rhetoric will be flexible, and there will be room for maneuver. In the longer term, this could become a powerful factor supporting the American stock market.

The event will contain a number of points that investors should pay attention to. It should be noted that neither the Federal Reserve's digital forecasts nor Janet Yellen's press conference are scheduled this time.

. Interest rates. In March, the key rate was increased by 0.25% and amounted to 0.875% (range 0.75-1%), which was the third revision since December 2008. This time, no changes in monetary policy are expected. This will not be a surprise; the Federal Open Market Committee (FOMC) traditionally adheres to a policy of active action, preferably at the so-called pivotal meetings, which the May one is not (). The Fed's view on the future prospects for monetary policy deserves attention.

In detail

. General state of the economy- can be assessed as a temporary (desirable) weakening. According to the first estimate, in the 1st quarter. UWB GDP added only 0.7%. The dynamics are the worst in three years. In the 4th quarter In 2016, the increase in the indicator was 2.1%. Let us note that so far the US macro data are not very encouraging. The Citi Macro Surprise Index, which measures how much actual data differs from forecasts, has plummeted over the past couple of weeks.

Source: Zerohedge

These data are mainly for the weak 1st quarter. On the 2nd quarter Analyst consensus suggests a 2.7% growth in the American economy, and the Atlanta Fed (GDPNow service) +4.3%. It is noteworthy that in the 1st quarter. GDPNow initially predicted +2.5%, but gradually the estimate dropped to +0.2%. If there are no positive changes in the April data, then there is a factor against raising Fed rates in the near future.

. Labor market— perhaps one of the key factors that the Fed is focusing on in the current conditions. The situation on the labor market observed in March looks ambiguous. In general, the segment is close to the state of so-called “full employment”. One part of the report, based on household surveys, showed unemployment falling from 4.7% to 4.5%, while analysts had expected it to remain at 4.7%.

At the same time, payrolls showed very weak growth in jobs outside the agricultural sector by only 98 thousand compared to the forecast 180 thousand. It must be understood that non-farm payrolls are periodically subject to serious revisions. Average wages increased by 0.2% compared to February. On an annualized basis, the figure rose by 2.7%, not far from +3%, at which the Fed would become more confident in raising rates.

. Inflation. The indicators are close to the Fed's target of 2%, but have cooled a little lately. Thus, the growth of the Fed’s favorite consumer spending price index in March y/y amounted to 1.8%. Core PCE (excluding food and energy - volatile components) increased by 1.6% compared to the same period last year. In March, the Consumer Price Index increased by 2.4% after +2.7% in February. The weakening of oil prices had an impact, the main culprits being US oil and gas companies, which are actively increasing production.

Following the results of the December meeting, the Fed predicted 3 stages of increasing the key rate by 0.25 percentage points. for this year - up to 1.4%. According to the derivatives segment (CME FedWatch), the next (after March) increase in the fed funds rate should be expected in June, and then in December.

The US Federal Reserve is unlikely to raise interest rates on Wednesday, but its meeting in June is attracting increasing attention from observers.

Almost no one expects the Fed to raise short-term interest rates following its two-day meeting, which ends on Wednesday. Investors are pricing in a 95% chance that the central bank will keep its key rate in the 0.75%-1% range this time, according to CME data.

However, the central bank will give its latest view of the economic situation and could signal what the outlook for interest rates is in the coming months. The Fed statement will be delivered on Wednesday at 1800 GMT. There will be no new forecasts, and there will be no press conference from Chairman Yellen. But here's what you should pay attention to:

PREPARATION FOR JUNE

The statement may contain hints at the likelihood of a key rate increase at the next meeting, which will take place on June 13-14. Fed policymakers expect two more interest rate hikes this year, with investors estimating the likelihood of a June hike at 71%. However, the authorities are unlikely to commit themselves to any specific promises.

They will want to study two more monthly US jobs reports due ahead of the June meeting, as well as a range of other economic data. They will most likely stick to the tactics they used earlier this year. In their Feb. 1 statement, central bank officials gave no indication they were considering raising the key rate in March. However, as the March meeting approached, senior Fed officials increasingly signaled that they were ready to act, and on March 15, the authorities announced that they would raise rates.

INSTABILITY OF THE ECONOMIC SITUATION

Close attention will be drawn to Fed leaders' assessment of economic data, which has recently deteriorated. GDP grew just 0.7% year on year in the first quarter as consumers tightened their belts.

Inflation also eased in March, which could worry the central bank as it assesses the economy's ability to withstand rising borrowing costs. The personal consumption expenditure price index, a key inflation gauge for the Fed, fell 0.2% from the previous month.

However, the economy continues to create jobs and consumers remain positive. Fed policymakers could signal whether they view the recent data weakness as temporary or view it as a worrying slowdown in economic growth.

FED BALANCE SHEET

Many market participants will be looking for clues as to when the Fed will trim its massive portfolio of bonds and other assets, which now stands at about $4.5 trillion. At their March meeting, central bank policymakers concluded they would likely begin reducing the balance sheet later this year.

The central bank is likely to discuss the topic this week, too, but economists are divided on whether the Fed will change the balance sheet portion of its statement. Goldman Sachs said in a recent note to clients that the announcement would likely be consistent with minutes from the Fed's March meeting, which said balance sheet shrinkage should be gradual and predictable.

However, the Fed may choose to reveal details of its deliberations only in the minutes of its May meeting, which will be released after the usual three-week delay on May 24.

GLOBAL ECONOMIC GROWTH

Despite signs of strengthening in economies outside the United States, central banks in Europe and Japan appear to be in no hurry to unwind monetary support given weak inflation. Moreover, elections will take place in France and the UK between the May and June Fed meetings. Their results, especially if populists win in France, could change the political and economic landscape of Europe and plunge the region into uncertainty.

In early 2016, Fed officials signaled strongly that global problems could threaten the U.S. economy and promised to keep an eye on external risks.