23 January 2022 Monetary Policy & Inflation | US

Fed Meeting: The Fed May Hold Steady

By Dominique Dwor-Frecaut
4 min read

US

Key Points

The Fed is likely to stick to the current taper schedule, prepare the market for a March hike and hint that QT could start around mid-year.
Q4 GDP is likely to surprise on the downside mainly due to weak consumption.

Fed

FOMC meeting: I do not expect Chair Powell hawkishness to be noticeably stronger than during his confirmation hearings. I expect the Fed to:

View recent data weaknesses (and curve flattening) as omicron related and transitory
Confirm that purchases of securities will end in March as previously scheduled
Prepare the markets for a March hike and leave open the possibility of a fourth hike this year, against 3 in the Dec. SEP
Hint that QT2 could start around mid-year, with low caps that would be raised more quickly than during QT1

I will publish a full preview on Tuesday.

Data

The big surprise of the week was a steep increase in initial jobless claims that could signal a weakening of the labor market, though the claims data tends to be very noisy.

There were further signs that the current wave of infections is past its peak with cases, test positivity and hospital occupancy falling or peaking. Air passenger traffic has stabilized and school closures fell by half.

This is a data heavy week. The most important releases will be:

Dec. personal spending and Q4 GDP: with consumption representing 70% of US growth. Dec. personal spending will drive the advance estimate of the Q4 GDP. Based on last week’s large negative surprise in retail sales, I agree with this week’s consensus of -0.5% mom for personal spending but expect income growth to be lower than the consensus 0.5% mom. I also expect the personal savings rate to have remained around 7%, its pre-pandemic level. With a stable personal savings rate, growth will have to come from labor income, that is slowing. Based on a 1% mom fall in Dec. real personal spending I expect Q4 GDP to be closer to 4.5% saar than the 5.7% consensus estimate.

Dec. PCE: because the supply bottleneck is imparting unusual volatility to core inflation, especially goods, measures such as trimmed mean or median price inflation have become more representative of inflation trends than core inflation. Like the trimmed mean CPI, the trimmed mean PCE has been slowing mom and I will be looking for a continuation of this trend.

Q4 ECI (Employment Cost Index): I expect a larger increase than the consensus 1.1%. Q4 headline PCE is likely to be around 1.5% QoQ sa and I expect the ECI to be close to that number. A print significantly below PCE would signal a weakening labor market in Q4 as well as faster disinflation.

Jan CB consumer confidence and initial unemployment claims: I will be looking for signs of weakening labor market namely a further high claims print as well as a decline in the CB index of jobs plentiful vs hard to find.

Durable goods orders: I agree with the consensus 0.3% mom increase in non defense capital goods orders. Capital goods orders, a proxy for capex, have been unusually strong since the pandemic mainly due to substitution of capital to labor and reshoring of global supply chains.

Dec. retail inventories: ex-autos these are much higher than pre-pandemic and I will be looking for continued strong growth as a sign that omicron has delayed normalization.

Jan PMIs from Markit (manufacturing and services), Richmond and KC Feds; Chicago Fed national activity index: I generally expect a dip in line with recent weaknesses in other data.

Events/Political Developments

The first assessments of the November individual Senate races are out, with 3 toss up in seats currently held by Republicans and 2 in seats held by Democrats, though the elections are more than 9 months away, a very long time in politics.

In a speech to the World Economic Forum Treasury Secretary Yellen described the Build Back Better bill as ‘modern supply side economics‘. The bill remains stuck in Congress where centrist Democratic Senator Manchin, who opposes the current version, stated that negotiations would have to restart “from scratch”. The administration is renewing its push to get the House to pass a $250bn bill that would boost US investment in tech and manufacturing. The Bill was passed by the Senate last year.

The Senate judiciary committee approved on a bi-partisan basis an antitrust bill that would prevent big tech platforms from favoring their own products over their competitors. A similar law was voted by the House last year.