Thursday, 01 August 2013

FOMC statement: no hints about tapering

FOMC keeps policy unchanged. Asset purchase programme continues .while Fed funds target range remains 0 to 0.25%. Fed reaffirms highly accommodative policy will remain appropriate for long Committee is slightly more cautious on economic growth and too low inflation. Statement contains no hint about timing of the start of tapering asset purchases We still favour the Sept. meeting as starting point tapering, but data-dependent Market reactions subdued.

Unchanged policy stance is no surprise

heFOMCkeptitspolicyunchanged.TheFedfundtarget rangeremainsat0to0.25%andtheassetpurchase programmecontinuesunaltered.Nooneexpectedthe FOMCtomakesuchchangestoitspolicyatthismeeting. Howeversomeexpectedtogetsomehintsaboutthe futureoftheFedsassetpurchaseprogrammeorsome changesinitscommunicationonrates.Indeed,afterthe Junemeeting,Bernankegave multiple hints that the Fed may soon start to reduce gradually the pace of purchases.Iftheeconomyevolvesaccording totheeconomicprojections,theFOMCmaydecidethis yeartostarttaperingthepurchases.Thereductionmay continueinthefirsthalfof2014andmay end by mid 2014, when unemployment should have fallen to 7%.

No hints about timing policy change

However, yesterdays FOMC statement gave no hints whatsoever about the start of this tapering.Thisshouldbenobigsurprise,astherewas sincetheJunemeetingonlylittleneweconomic informationavailable.ItwasalsounlikelytheFOMC wouldhavechangedpolicyinthemidstofthesummer holidayswhenmarketsarethinandsurprisescause unusuallyhighvolatility.Nevertheless,someFed watchersspeculatedthattheFOMCwouldmakesome changesinitscommunicationthatwoulddefacto prolongthetimetheFOMCwouldkeepavery accommodativepolicy(seebelow).Otherswerelooking forhintsaboutthetimingofthestartofthereductionof purchases.Theydidntfindsuchhints.TheMinutesof themeeting,tobereleasedmidAugust,maygiveus moreinsightswhichwaytheCommitteeleanson

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purchasetapering.Ifnot,thentheSeptembermeeting shouldbedecisive.

Some more caution though

ComparedtotheJunestatement,theJulystatement containedonlysomelimitedchanges.Nevertheless, they pointed to a somewhat more cautious position of the Committee on the outlook and some will say they diminish chances the FOMC would start its taperingof purchases in September.We do not agree with the latter deduction and keep the September meeting as the most likely starting date for the reduction of asset buying. First,theFOMC downgraded its assessment of the economyslightlyandsaidactivityexpandedata modestpaceinthefirsthalfoftheyear,whileinJuneit stillcharacterizedtheactivityasexpandingmoderately. Second,itaddedthe rise in mortgage rates as a downside risk,besidestherestraintcomingfromfiscal policy,whichwasalreadyinthepreviousstatement.The descriptionofthedevelopmentsinthevarioussectors likethelabourmarket,householdspending,business fixedinvestmentandhousingwasunchanged(fromthe previousstatement)andquiteoptimistic. Alsotheparagraphonthe outlookcontainedtwo changes.First,theCommitteeexpectsthateconomic growthwillpickupfromitsrecentpace,whileinJune, thestatementsaidtheCommitteeexpectseconomic growthwillproceedatmoderatepace.Thischangewas probablyinspiredbythedowngradingoftheactual economicsituation(seehigher)andthusmayhavebeen triggeredbytheneedtodescribetheecosituationinline withtheharddata.GDPgrowthof1.1%and1.7%inthe firsttwoquartersisindeedmodestandnotmoderate. Thereforewewouldntreadtoomuchinthischange. More importantly,theCommitteenowrecognizes explicitlythatinflationpersistentlybelowits2% objectivecouldposeriskstoeconomicperformance.The statementcontinuesbysayingthatitanticipatesthat inflationwillmovebacktowardsitsobjectiveoverthe mediumterm.Onecouldconsiderthisadditionas dovishanddiminishchancesforapolicychangeon purchasesinSeptember.Itsadditionwasprobablymade tobringStLouisFedgovernorBullardagainonboard,He dissentedinJune,becausehewantedtheFOMCshould signalmorestronglyitswillingnesstodefenditsinflation

goalinthelightofrecentlowinflationreadings.Asa consequence,Bullardjoinedthemajoritythistimeand fullyagreedwiththestatement.ThatleftKansascityFed Georgeastheonlydissenter.Shevotednowforthefifth timeagainstthepolicywhichshesaidincreasesrisksof futureimbalances.

Accommodative policy appropriate

TheFOMCreaffirmeditsviewthatahighly accommodativestanceofmonetarypolicywillremain appropriateforaconsiderabletimeaftertheasset purchaseprogrammeendsandtheeconomy strengthens.Italsodecidedthattheexceptionallylow rangefortheFederalfundsratewillbeappropriateat leastaslongastheunemploymentrateremainsabove 6.5%,inflationonetotwoyearsaheadisprojectedtobe nomorethan0.50%pointabovethe2%longerrungoal andlongterminflationexpectationscontinuetobewell anchored.SomeobserversexpectedtheFOMCtolower theunemploymentratethresholdto6%and/ortoinsert alowerboundforinflationtoclearlyseparatetheQE policyfromtherateandexitpolicy.Indeed,afterthe JunemeetingwhenBernankesetoutthescenariofor endingtheassetpurchases,marketsstartedtobring forwardtheliftoffdateforratehikes,whichtheFed didntlikeatallandcausedsomeverbalinterventionby Bernanke.However,theFeddidntdoitandkeptthe thresholdsunchanged.

Market reactions subdued

First,themarketreactioncorrespondedwithadovish lectureofthestatement.USTreasurieswentup,asdid equitieswhilethedollarlostground.However,assaid, theFOMCstatementcontainsnostrongpolicymessage andthuswearentsurprisedtheinitialmoveswere largelyerasedbytheendofthesession.Yields at the longer end were though still a few basis points lower in a daily perspective.Letswaitnowfor freshecodata,startingwiththeISMtodayandpayrolls tomorrow. PietLammens,KBCBrussels

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Contacts
BrusselsResearch(KBC) PietLammens PeterWuyts JokeMertens MathiasvanderJeugt DublinResearch AustinHughes ShawnBritton PragueResearch(CSOB) JanCermak JanBures PetrBaca BratislavaResearch(CSOB) MarekGabris WarsawResearch BudapestResearch DavidNemeth
ALLOURREPORTSAREAVAILABLEONWWW.KBCCORPORATES.COM/RESEARCH
Thisnonexhaustiveinformationisbasedonshorttermforecastsforexpecteddevelopmentsonthefinancialmarkets.KBCBankcannotguarantee thattheseforecastswillmaterializeandcannotbeheldliableinanywayfordirectorconsequentiallossarisingfromanyuseofthisdocumentorits content.Thedocumentisnotintendedaspersonalizedinvestmentadviceanddoesnotconstitutearecommendationtobuy,sellorholdinvestments describedherein.AlthoughinformationhasbeenobtainedfromandisbaseduponsourcesKBCbelievestobereliable,KBCdoesnotguaranteethe accuracyofthisinformation,whichmaybeincompleteorcondensed.AllopinionsandestimatesconstituteaKBCjudgmentasofthedataofthe reportandaresubjecttochangewithoutnotice.

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