US Fed: Subtle changes hint at upside risks to rates - ING

Some modest changes regarding the inflation commentary suggest an ongoing appetite to raise interest rates, writes James Knightley, Chief International Economist at ING.

Key quotes:

“There was perhaps an acknowledgement of slightly stronger price pressures in the statement, but it is marginal. They removed the comment that inflation “will remain somewhat below 2% in the near term” while added that measures of inflation compensation “have increased in recent months”, but also state that they “remain low”. They continue to think inflation will “stabilize around the Committees 2 percent objective” while “near term risks to the economic outlook appear roughly balanced”.”

“In another change, the Fed also subtly added the word “further” to the sentence saying they expect economic conditions to “warrant further gradual increases in the federal funds rate”. They also removed the description of hurricane-related issues in the data, which is unsurprising given the vast bulk of the distortions have worked their way through now.”

“Like the Fed itself, we are forecasting three 25bp interest rate increases this year. However, the potential for another, more damaging, government shutdown, the likelihood core CPI will remain below 2% until after the March FOMC meeting and the possibility that bad weather could hurt activity data mean we are not currently forecasting a 21 March hike. However, should these threats subside we will likely have to change that – probably inserting it as a fourth hike rather than just shifting forward the three 2018 moves we are currently predicting.”