Market Economics | Interest Rate Strategy - BNP PARIBAS ...
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US: FOMC to Hold the Line<br />
• We do not expect any change in tone at the<br />
January FOMC meeting.<br />
• While the January voter rotation brings in a<br />
hawkish group, there seems to be solidarity in<br />
the near term.<br />
• The more difficult debates will arise as QE2<br />
nears completion and the Fed has still made<br />
little progress on its mandates.<br />
The FOMC will next week set its economic<br />
forecasts for the monetary policy report to<br />
Congress. It is likely to choose a cautious<br />
interpretation of recent economic strength<br />
The Fed meets next week to evaluate the economic<br />
outlook and stance of monetary policy. The meeting<br />
will last two days as the Committee is also setting its<br />
quarterly forecasts ahead of the monetary policy<br />
testimony before Congress in mid-February.<br />
Not much has changed on the economic front since<br />
the mid-December meeting. Data have continued to<br />
confirm that Q4 is shaping up to be a strong quarter<br />
for final demand growth, yet labour market indicators<br />
have shown little benefits from stronger spending<br />
with steady but lacklustre job creation.<br />
Headline inflation has surged while core inflation and<br />
wage growth remain under pressure. The equity<br />
market continued to rally while house prices have<br />
steadily fallen and interest rates remained above<br />
those that prevailed for most of the year prior to the<br />
November FOMC meeting.<br />
At the December policy meeting, the FOMC chose a<br />
cautious interpretation of the Q4 strength and that<br />
seems likely to continue. Indeed, Chairman<br />
Bernanke reiterated that cautious stance at his<br />
Congressional testimony after the December<br />
employment report. He said “Although recent<br />
indicators of spending and production have generally<br />
been encouraging, conditions in the labor market<br />
have improved only modestly at best…overall, the<br />
pace of economic recovery seems likely to be<br />
moderately stronger in 2011 than it was in 2010.”<br />
Most Fed speakers have publicly supported the<br />
completion of QE2 and we expect little change to the<br />
tone of the policy statement released next<br />
Wednesday.<br />
A hawkish rotation of voters may actually bring<br />
increased near-term solidarity<br />
Every January brings a rotation of FOMC voters. All<br />
Governors at the Federal Reserve Board are<br />
permanent voting members, as is the President of<br />
the New York Fed. However, four of the 12 regional<br />
bank presidents serve rotating one-year terms as<br />
voters. Rotating out as voters are Cleveland Fed<br />
President Pianalto, Boston Fed President<br />
Rosengren, St. Louis Fed President Bullard and<br />
Kansas City Fed President Hoenig.<br />
Presidents Pianalto and Rosengren are fairly dovish<br />
and stood solidly behind the Fed’s QE policies.<br />
Dudley V Lockhart Bernanke V Bullard Fisher V Hoenig<br />
(New York) (Atlanta) (Chairman) (St. Louis) (Dallas) (Kansas)<br />
Evans V Yellen V Duke V Warsh V Kocherlakota V Lacker<br />
(Chicago) (Vice Chair) (Governor) (Governor) (Minneapolis) (Richmond)<br />
Raskin V Tarullo V Plosser V<br />
(Governor) (Governor) (Philadelphia)<br />
Rosengren V<br />
(Boston)<br />
Pianalto<br />
(Cleveland)<br />
1 2 3 4 5 6 7 8 9 10<br />
Dove<br />
Inflation forecast informed mainly by Phillips Curve<br />
View high unemployment as mainly cyclical<br />
and therefore can be helped with policy<br />
Hawk<br />
Inflation forecast informed by monetary policy stance<br />
View high unemployment as mainly structural<br />
and therefore immune to policy<br />
Notes: “V” indicates the FOMC member is a voter in 2011. All FOMC participants without a regional affiliation are members of the Federal Reserve Board, all of whom are voters. There are currently two<br />
vacancies on the Board. Participants’ views can and do change over time.<br />
Julia Coronado 20 January 2011<br />
<strong>Market</strong> Mover<br />
10<br />
www.Global<strong>Market</strong>s.bnpparibas.com