20181017-法国巴黎银行-US_FOMC___What_to_do_about_neutral___6页_862kb

FLASH | AMERICAS - MARKETS 360 Summary

Core Content Overview

This document provides an analysis of the U.S. Federal Open Market Committee (FOMC) meeting minutes from September 2018, focusing on the Fed's monetary policy outlook, the debate on neutral interest rates, and potential future actions. It is part of a broader market strategy and economics report by BNP Paribas, highlighting key market views and policy implications.

Main Points and Key Information

1. FOMC Outlook and Policy Direction

• The FOMC remains optimistic about near-term economic growth and is comfortable with the current inflation trajectory.
• There is a growing concern about foreign risks, particularly international developments, which have become a more prominent focus.
• The Committee emphasized that its decisions will be based on a wide range of information, including labor market conditions, inflation indicators, and financial and international developments.
• The Fed is expected to continue raising interest rates gradually as long as economic conditions justify it.

2. Neutral Interest Rates Debate

• There was a significant discussion within the FOMC on the level of neutral interest rates.
• The Committee acknowledges the difficulty in precisely estimating neutral rates and expressed concerns about the potential for misinterpretation if they were to set specific targets.
• The decision was made to remove the accommodative forward guidance language from the FOMC statement to avoid giving a false sense of precision.
• The debate may reflect differing views among participants on short-term versus long-term neutral rates.
• "Almost all" participants supported the removal of the language, indicating broad agreement on the need for flexibility.

3. Balance Sheet Policy and Operating Framework

• The FOMC did not discuss major changes to the operating framework or balance sheet policy.
• The balance sheet reinvestment caps have reached their peak at USD30bn per month, suggesting that the Fed may begin considering future balance sheet adjustments.
• The possibility of another technical adjustment to the Interest on Excess Reserves (IOER) rate remains if the spread between IOER and the federal funds rate continues to narrow.

4. Communications Subcommittees and Market Views

• A new subcommittee on communications issues was established, with Fed Vice Chair Richard Clarida appointed as its chair.
• The subcommittee’s role is to help prioritize and frame communications issues for the FOMC.
• The market outlook suggests that the U.S. economy may soften in the coming year, with a base case of two further rate hikes, potentially three if economic momentum continues.

5. Market Implications

• The 2s30s U.S. Treasury yield spread is expected to flatten significantly, with a target of 0bp by mid-2019.
• This flattening is already broadly priced into the 2s10s forward curve.
• The 10s30s spread is seen as having the most potential to flatten, due to structural pension demand for duration and the Treasury's issuance bias towards the front-end.

Summary of Key Views

• Economic Outlook: Positive but with increased caution on international risks.
• Interest Rate Policy: Gradual hikes expected, with the Fed maintaining flexibility on neutral rate estimates.
• Balance Sheet Policy: No immediate changes, but future adjustments are under consideration.
• Communications: Improved focus on how the Fed communicates its policy stance.
• Yield Curve: Expectation of continued flattening, especially in the longer end.

Legal and Compliance Notes

• The document is a marketing communication and not investment research.
• It is intended for professional clients and eligible counterparties.
• The content may contain performance data based on back-testing and is not guaranteed.
• BNP Paribas and its affiliates may have conflicts of interest, and the information is not intended to provide investment, tax, or legal advice.
• The document includes important disclosures for options, ETFs, and convertible securities, emphasizing the risks involved and the suitability for sophisticated investors.

Conclusion

The FOMC's September meeting minutes indicate a cautious but optimistic stance on the U.S. economy, with a focus on managing foreign risks and maintaining a flexible approach to monetary policy. The Fed is likely to continue raising rates gradually, while the debate on neutral rates highlights the uncertainty in policy direction. The document also outlines the firm's market views on yield curve dynamics and balance sheet policy, alongside important legal and compliance disclosures.