FOMC Review: Fed thinks it's just a phase – Rabobank

Philip Marey, Senior US Strategist at Rabobank, explains that the disappointing economic data in recent weeks are noise as far as the FOMC is concerned and the Committee views the Q1 GDP growth slowdown as likely to be transitory.

Key Quotes

“They even claimed that job gains were solid, on average, in recent months. (Indeed averaging out the weak March payroll growth figure does the trick…) Moreover, while household spending rose only modestly, fundamentals underpinning the continued growth of consumption remained solid. This suggests that the Fed is still aiming for a June hike. So look for Fed speakers starting on Friday for further clues and their reactions to the incoming data (most notably the nonfarm payrolls).”

“Advocate of the devil in the details

While we agree that the low Q1 GDP growth figure can largely be attributed to residual seasonality in the GDP series published by the BEA, and that the weather could have affected personal spending in the early months of the year, other data give us some reason for concern. Many analysts were too quick to dismiss the weak nonfarm payroll growth in March as a reflection of bad weather. In fact, other BLS data revealed that there was only a minor increase in the number of people with a job not showing up for work due to bad weather between February and March. What’s more, the payroll growth slowdown in March was also evident in the employment sub-index of the ISM Non-Manufacturing Survey.

The figure for April was even slightly weaker. And earlier this week, the employment sub-index of the ISM Manufacturing Survey dropped as well. In our view, it’s too early to dismiss recent data as noise, in fact there may be several signals that should not be overlooked. What may appear as transitory at first, could very well be a more sustained loss of momentum in the economy. The same is true for inflation. Earlier this week we learned that both the headline and the core PCE deflator had fallen in March, dragging down the year-on-year core inflation rate to 1.6%. More importantly, the March decline in core consumer prices was acknowledged by the FOMC in its statement. Therefore, we continue to have our doubts about that June rate hike. For now, we expect this year’s second hike in December, unless we see an improvement in the data.”

“Final note

Meanwhile, the FOMC statement saw no change regarding the reinvestment policy. The Committee is maintaining its existing policy of reinvesting principal payments from its asset holdings and it anticipates doing so until normalization of the level of the federal funds rate is well under way. For details about the discussion that took place at this meeting we will have to wait for the release of the minutes in three weeks and remarks by Fed speakers in the coming weeks.”