Fed: Prospects of tighter policy continue to diminish - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that the US monetary policy and the prospects of tighter policy continue to diminish.

Key Quotes

“Our colleagues at NAB now look for only two hikes by the US Fed in 2017 (previously three), following an expected December rate hike this year. On recent trends – in fact even dating back to the beginning of the economic recovery post GFC – one must consider the possibility of the revised Fed view being too hawkish. According to the OIS market, just one full Fed rate hike is priced in through to the end of 2017.

US Fed officials have seemingly continually espoused a view that monetary policy will need to normalise at some stage and that means higher rates, towards some sort of neutral policy setting at the very least. Interestingly the debate is beginning to shift. St Louis Fed President Bullard was the first to capitulate in June, when he changed his view to just one more Fed tightening through to the end of 2018. His ‘dot’ looked very lonely in the dot plot and made him the most dovish member of FOMC.

This week San Francisco Fed President Williams has weighed in on the debate and the future of central banking. He suggested that in the new world of a low natural real rate of interest, central banks should be looking to change their approach – either move to increase the target inflation rate, change to a price level target, or change to a nominal GDP target, for example. Any of these moves would encourage lower for longer US rates.

New York Fed President Dudley got the market’s attention with his view that rate hikes are very much live for this year, possibly as soon as September. But, taking a longer perspective he added that the Fed didn’t actually have a lot of monetary policy tightenings to do over time, a likely nod to the Bullard/William’s view.

One can’t naturally expect a change to central banking as we currently know it anytime soon. Any such suggested changes would likely have a long gestation period. But the debate plays to the hand of a prolonged period of entrenched low global interest rates.”