Take it Easy
While there was little doubt about the outcome of this week’s FOMC meeting, there were still three important takeaways:
- The Fed gave no indication they feel they are behind the curve
- Sharply easing financial conditions – especially credit spreads – are a growing concern for the Committee
- There is some tolerance to overshoot their 2% inflation objective
The Fed strengthened its consensus around two more rate hikes in 2017 and this is now MIG’s base case as well. However, markets remain unconvinced of this and may be in a for a rude shock later this year.
Looking further ahead, as the FOMC moves forward with increasing rates, the question of balance sheet reduction becomes more critical. It is a major tool for the Fed and constitutes the next phase of monetary tightening. The Committee currently provides little guidance or forecasts for it. MIG expects this topic to draw much more attention from the FOMC and markets over coming months.
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