Yesterday, Fed Chair Jerome Powell reiterated his positive baseline outlook on the economy, although he sounded more cautious as he put more emphasis on the risks surrounding this baseline. Most importantly, he stated that rates are now “just below” their neutral level. This implies a lower estimate for the neutral short-term interest rate than the 3.0% indicated by the latest dots. It also contrasts with Powell’s comments in a speech on October 3, in which he said that rates were “a long way from neutral”. In combination with the growing risks to the outlook and financial markets, this probably implies a shallower rate hike path than the one the Fed envisaged in September.
Today, the minutes of the 8 November FOMC meeting will be published. They will probably corroborate the outlook for another 25bp rate hike in December – which, in our view, is still valid despite Powell’s more cautious remarks yesterday. Back in November, the committee likely discussed that the interest on excess reserves could be raised by less than 25bp in order to push the effective fed funds rate back to the middle of the target band. In addition, we will be looking for hints about the Fed’s future operating framework, in particular the target size and composition of its balance sheet. This framework was supposed to be discussed “in the fall”.
Inflation And The Fed Rate
U.S. consumer spending jumped 0.6% in October as households spent more on prescription medication and utilities. Data for September was revised down to show spending rising 0.2% instead of the previously reported 0.4% gain. The market had forecast consumer spending increasing 0.4% in October.
When adjusted for inflation, consumer spending advanced 0.4%, also the biggest gain in seven months and pointing to a solid pace of consumption early in the fourth quarter.
In October, spending on goods surged 0.5% after gaining 0.1% in September. Outlays on services shot up 0.7% after rising 0.3% the prior month. There was a slowdown in price gains last month. The PCE price index excluding the volatile food and energy components edged up 0.1% after increasing 0.2% in September. That lowered the year-on-year increase in the so-called core PCE price index to 1.8%, the lowest reading since February, from 1.9% in September. The core PCE index is the Fed’s preferred inflation measure. It hit the U.S. central bank’s 2% inflation target in March for the first time since April 2012.
Despite the strong consumer spending, there are indications that economic growth is slowing. Data this month suggested a moderation in business spending on equipment, a deterioration in the trade deficit as well as further weakness in the housing market.
EUR/USD pulled back above 1.1300 after Jerome Powell sounded more dovish than expected, apparently validating market speculation regarding more prudent tightening by the Fed. Focus is now on the 1.1424 Fibo, which is 76.4% of the 1.1472-1.1267 drop. We think that a potential drop in the EUR/USD after FOMC minutes should be used as fresh buying opportunity.
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