The forward guidance delivered by the Fed yesterday “was no longer about being patient but being pragmatic,” according to JP Morgan Asset Management global market strategist, Kerry Craig, with yesterday’s Federal Open Market Committee meeting in the US signalling a shift in its attitude.
Inflation was considered more seriously at the June meeting as compared to last month, with the Fed forecasting a downward revision to headline inflation this year and Craig noting that a combination of inflation taking longer to return to target and trade uncertainty making the central bank take a dovish tone.
Further, while Craig believed that the rate of inflation could still move back toward the Fed’s target, there was little to suggest that it would prevent a rate cut in as much as a cut would trigger higher inflation. He observed that the “Fed seemed to do everything but cut at this meeting”, but that there was “little hard in the Fed waiting another month to see what transpires”.
Factors the Reserve Bank could be waiting for included clarity around trade tensions and the deterioration of the US-China relationship, with Craig saying it may as well wait to see what happens at the G20 meeting next month and whether the strained situation escalates before acting.
“Just where trade talks between the US and the rest of the world are going, whether the weakness in the May labour market report will persist, as well as the second quarter GDP report, will give a better read on the drivers of growth,” the market strategist said.
These were already eventuating however, with Craig noting that even as the unemployment rate fell, wages looked unlikely to rise significantly, and that capital spending intentions in the manufacturing sector had already faded in the wake of the tense trade situation.
Craig also said that “this meeting was always going to be a challenge in managing market expectations” for the Fed, given the swift repricing in bond markets of cuts this year: “Fed Chair Jerome Powell managed to walk the fine line, highlighting a level of confidence in the US economy, even as growth is expected to slow, and vulnerabilities from global politics increase.”
The chart below tracked the US Bureau of Statistics’ US Consumer Price – All Urban Consumers index, showing CPI over the year to May’s end.
