Fed Ups 2011 GDP Forecast But Maintains Dovish Outlook on Inflation, Jobs
Participants in the January 25-26 FOMC meeting expressed more confidence in the sustainability of growth. Mainstream policy makers remain steadfast in support of expansionary policy, though a few said that more strong data could justify a reduction in the pace and size of Treasury security purchases, noting that recent data has not changed policy makers outlook much.
On the labour market the FOMC staff observed that while the recovery was firming, expansion had not been sufficient to produce much improvement in the labour market, improvement in January was “gradual”. The drop in the jobless rate to 9.4% in December was due “in part” to a drop in participation the minutes showed. Policy makers had similar views of the labour market, noting only gradual improvement. Participants overall were “disappointed” in the labour market performance and said they would monitor it closely. The focus on labour market conditions is central to Fed. Chair Bernanke’s view of monetary policy and the dovish observations by policy makers reveals plenty about the outlook for monetary policy.
At the meeting FOMC participants also updated their economic forecasts, they see a modest upgrade to GDP in 2011 to 3.3-3.6% from 3-3.6% projected last November, forecasts for 2012 and 2013 were little changed. Reflecting the dovish disposition of the Fed towards the labour market they lowered a tad their unemployment expectations for this year to 8.8-9%, 7.6-8.1% in 2012 and down to 6.8-7.2% in 2013. On inflation, policy makers see both core and headline PCE at or below 2% through 2013.
Turning to price action, the USD index got a mild boost upon the release, mostly from the upgraded growth expectations and generally upbeat tone of the report, however, as traders digested the details and made note of the dovish outlook for both inflation and the labour market the index resumed its declines. As mentioned above, with the labour market looking very unsure of itself and inflation set to remain well within normal parameters for the near-term speculation about any form of rate hike must be pushed well down the road. And with only mild upgrades to growth expectations there isn’t really rhyme or reason to expect the FOMC to curtail its QE activity any time soon either. All in all then, little to support the buck in short-term price action and no real surprise that the index resumed its descent soon after.
Written by Jonathan Granby, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.