The prospects for US economic growth are improving sharply, but it won’t be enough to see the US Federal Reserve lift interest rates – yet.
According to the Atlanta Fed’s GDPnow tracker, the gauge which nailed the Q1 GDP figure when it was first released in April, the outlook for US economic growth is improving quickly. As of June 11 the model now predicts real GDP growth of 1.9% in seasonally adjusted annual rate (SAAR) terms, significantly higher than the sub-1% levels seen at the start of June.
Here’s the updated chart. Clearly the prospects for the US economy are looking up, having contracted in the first three months of the year:
Societe Generale’s economics team believes the odds of a surprise rate hike from the Fed this week are “virtually zero”.
Here’s their view of what to expect from the June FOMC meeting, held on Tuesday and Wednesday this week (US EDT).
“The odds of any policy change following this week’s FOMC meeting are virtually zero. The Fed is also unlikely to signal when it will lift rates. Although our assumption is a September liftoff, we believe that it is too early for the FOMC to begin preparing the market for that move. Activity data – although better – is not yet convincing enough. The Atlanta Fed’s GDP “nowcast” currently estimates Q2 GDP at 1.9%. This is a significant improvement from early June when the nowcast stood below 1%, but this figure would still put average growth for the first half of the year well below 1%. The Fed will need to see much positive momentum in the activity data before having reasonable confidence in further progress toward its dual mandate. Moreover, the April FOMC minutes revealed a discussion about the merits of providing an explicit signal ahead of the lift-off, but most participants felt that the timing was too uncertain and preferred to adhere to a truly data-dependent approach. Given the above, market participants will look to the SEP, the tone of the FOMC statement and Yellen’s press conference for clues regarding the timing of the liftoff”.
Soc Gen expects the Fed will downgrade its 2015 economic growth forecast to 2.0%-2.2%, down from 2.3%-2.7% seen in March, with unemployment expected to remain at 5.0-5.2%. They also expect that forecasts for the fed funds rate, otherwise known as “the dots”, will be revised lower.
“We expect the economic projections and the dots to be more dovish than in the March SEP. In particular, the GDP forecast for this year is likely to be revised down from the 2.3%-2.7% range published in March, to 2.0-2.2%. The unemployment rate projections are likely to remain unchanged, with the jobless rate expected to reach its longer-run value of 5.0-5.2% (i.e. full employment) by the end of the year. This could potentially lead to a modest downgrade of longer-run growth. In March, the participants estimated trend GDP at 2.0-2.3% and we would not be surprised if this range is tweaked downwards, to something like 2.0%-2.2%. This could also prompt a modest downward revision in the longer-run fed funds rate. In the March SEP, the dots were somewhat divided between 3.5% and 3.75%, with the median falling narrowly in the 3.75% bucket. We expect the median to drop to 3.5% in the June SEP. As for the likely rate path, we expect the dots to show only one hike this year and four next year, down from two and five hikes in the March SEP”.
While markets will receive updated economic forecasts and a press conference from Fed chair Janet Yellen, along with the monetary policy statement, Soc Gen don’t believe markets will be given any additional clues as to when the Fed will begin to lift interest rates.
The bank believes this will occur at the September FOMC meeting, in line with current market expectations.