Chart of the Week: FOMC to hold fire for now

According to the Minutes of the Federal Open Market Committee’s latest meeting, participants accept the need to raise the fed funds rate again “fairly soon”. That is more likely to mean June than next month, in our view.

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Even though we expect US GDP and inflation to rise a lot faster than consensus this year, we anticipate just two 25 basis point increases in the fed funds rate in 2017. We saw nothing in last Wednesday’s Minutes that led us to question that view.

Indeed, we think that the Fed will let the economy run a little hot, rather than tightening interest rates aggressively this year. If we are right, then investors and the FOMC will reassess the prospects for monetary policy further ahead, bidding up the dollar and Treasury yields later this year.

Admittedly, this outlook is subject to greater-than-usual political uncertainty. Not only will the scale and timing of Mr Trump’s promised fiscal splurge have a significant effect on the economy, but the new administration is now responsible for filling three FOMC board seats this year following Daniel Tarullo’s resignation.

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