June 2017 FOMC - Economists react

"As we look forward, there are unanswered issues/questions. The three recent rate hikes have been accompanied by lower bond yields and a significantly flatter yields curve. At what point does the Fed become concerned? The renewed inflation weakness is puzzling —the unemployment rate is at 4.3%, a 16-year low, well-below the Fed’s estimate of the natural rate of unemployment, but wage increases remain modest even though there is mounting anecdotal evidence of pockets of labor market tightness and skill mismatches. If economic growth remains moderate and inflation lingers below the Fed’s 2% target, how would the Fed respond to continued rises in the stock market and home prices? Stay tuned." - Mickey Levy, Roiana Reid, Berenberg Capital Markets

"Unless the incoming data deteriorate or financial conditions tighten sharply — in other words, if the Fed's outlook remains broadly intact — we look for the Fed to skip hiking at its September meeting to announce balance sheet drawdown (to begin in October), then resume hiking in December. We continue to look for 4 additional hikes in 2018." - Ellen Zentner, Morgan Stanley

"So where to now? Our US economics team have concluded that their expectations for Fed policy for the rest of this year are unchanged post the meeting. That is they continue to expect a formal announcement about unwinding the balance sheet at the September meeting, to start in October. They also expect a pause in the rate hiking cycle in September, followed by another rate hike in December, assuming that the economy evolves in line with the Fed’s expectations. They add that it is possible for the Fed to both raise rates and announce a shift in its balance sheet policy at the same meeting if the economy, labour market, and (most importantly) inflation surprise to the upside. But recent inflation data have raised the bar for such surprises." - Jim Reid, Deutsche Bank

"We were obviously wrong about our non-consensus call that the Fed would skip hiking at this meeting. However, we are surprised that the Fed is not more worried about low inflation. We still fear the Fed is making a policy mistake, as economic data do not justify a hike, in our view. Unchanged dots but four FOMC members expect no further hikes this year - and we guess three of them are voting members. This puts a third hike this year into question. Fed may hike again in December, as it targets unemployment but risks are skewed toward a pause in the hiking cycle, so we expect a maximum of 1-2 hikes next year if anything." - Danske Bank

"The Fed's new economic forecasts show core inflation 0.2 percentage points lower at the end of this year than previously, at 1.7%, despite the unemployment forecast being reduced to 4.3% from 4.5%. This circle is squared by the lower starting point for the core inflation forecast - core PCE y/y is now 1.5%, compared to 1.8% when the March forecasts were made - so inflation rises but from a lower base. The unemployment rate has dropped by half a point in the past four months, but the Fed now expects, comically, no further decline across the rest of the year. This makes no sense at all and likely will have to revised in September, by which point it might be just 4.0%, well below the Fed's 4.6% Nairu estimate, down 0.1pp from March. That's just not consistent with the market's view that the Fed will hike only once more in this cycle. One side has to blink, and given the Fed's 50-year obsession with the unemployment rate, it's unlikely to be Dr. Yellen." - Ian Shepherdson, Pantheon Macroeconomics