Fed projects a weak USA recovery - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the global bond yields have also fallen, in part following the FOMC meeting where the Fed again downgraded its long-term neutral interest rate forecast from 3.0% to 2.9%, reflecting a lower long-run potential GDP growth rate forecast (reduced from a median of 2.0% to 1.8%).

Key Quotes

“It also continued to forecast a modest growth path of 2.0% in the next two years, slowing to 1.8% in 2019, and inflation only reaching its target of 2% sometime in 2018.

Corresponding with this modest growth and subdued inflation outlook, it lowered its outlook for rate hikes next year from a median of three to two, after also failing to deliver a hike and therefore lowering its median forecast for hikes this year from two to one.  As such, it essentially removed two hikes from the forecast horizon, indicating a slower path back to neutrality (2.9%) that is projected to take more than three years.

This modest pace of hikes is still above the market pricing in the curve, but it tends to confirm the trend towards delaying hikes and lowering the forward projections, supporting the tone in the market towards lower bond yields.

The Fed statement and press conference suggests that the Fed is quite keen to deliver one hike before year-end, suggesting that only a relatively stable trend in payrolls growth and a steady set of broader labor market indicators might be sufficient to support a hike; most likely after the 8 November election.  But a hike in these circumstances will appear to have been delivered reluctantly because the Fed has paused for a full year, and may be followed by another prolonged wait for a third hike in the cycle, unless the economy were to surprise to the upside.”