17 Dec 2014
US headline inflation drops from 1.7% to 1.3% in November - will the Fed care? – ING
FXStreet (Barcelona) - Rob Carnell of ING expects Fed to play a cautious hand tonight and leave the “considerable time” phrase intact due to soft US inflation numbers.
Key Quotes
“US inflation fell even more in November than the consensus had been expecting, dropping to 1.3%YoY (Cons = 1.4%, ING f = 1.4%) from 1.7% in October. However, PCE inflation, not CPI, is the Fed’s preferred measure of price stability, and this now looks likely to drop to between 1.2% and 1.3% when it is released on 23 December (down from 1.6% currently).”
“As far as tonight’s FOMC meeting is concerned, if the Fed really wants to it can try to “look through” the largely energy driven fall in prices, and focus more on core inflation. That said, core inflation also dipped slightly to 1.7% from 1.8%, and the direction of travel is an awkward one for the Fed if they have already decided to drop the reference to “considerable time” in the FOMC statement (a reference to the time following the end of QE before rates are raised).”
“We think that global financial backdrop also merits the Fed playing a cautious hand tonight, and leaving the key statement phrase intact. But this is a close call. These inflation numbers help to bolster our “no change” view. But they are not enough on their own. And if the Fed focuses mainly on domestic, not international risks, then a change to the text is still a possibility.”
“If that does happen, then we expect stock markets to react negatively, and US bond yields to drop.”
“The USD reaction is less clear, as falling bond yields may be offset by safe-haven buying if the decision worsens sentiment in international financial markets. On balance, however, we see the USD outcome from dropping “considerable time” as slightly USD negative.”
Key Quotes
“US inflation fell even more in November than the consensus had been expecting, dropping to 1.3%YoY (Cons = 1.4%, ING f = 1.4%) from 1.7% in October. However, PCE inflation, not CPI, is the Fed’s preferred measure of price stability, and this now looks likely to drop to between 1.2% and 1.3% when it is released on 23 December (down from 1.6% currently).”
“As far as tonight’s FOMC meeting is concerned, if the Fed really wants to it can try to “look through” the largely energy driven fall in prices, and focus more on core inflation. That said, core inflation also dipped slightly to 1.7% from 1.8%, and the direction of travel is an awkward one for the Fed if they have already decided to drop the reference to “considerable time” in the FOMC statement (a reference to the time following the end of QE before rates are raised).”
“We think that global financial backdrop also merits the Fed playing a cautious hand tonight, and leaving the key statement phrase intact. But this is a close call. These inflation numbers help to bolster our “no change” view. But they are not enough on their own. And if the Fed focuses mainly on domestic, not international risks, then a change to the text is still a possibility.”
“If that does happen, then we expect stock markets to react negatively, and US bond yields to drop.”
“The USD reaction is less clear, as falling bond yields may be offset by safe-haven buying if the decision worsens sentiment in international financial markets. On balance, however, we see the USD outcome from dropping “considerable time” as slightly USD negative.”