Back in March, Fed Chair Janet Yellen already said that the first US rate hike will come around 6 months after QE ends, but her colleagues and her later made it clear that it will take a long long time. Her comment to that question was later considered a slip in her first press conference.
Update: Taper 5: lower 2014 GDP forecast – USD shakes
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But was it a slip or a just the first test of waters before indicating an earlier rate hike than expected? The strong US inflation numbers raise the chances of the latter option. While she may not go the full length of Carney’s explicit statement, she could use the dot charts to calibrate expectations.
Head of the BOE Mark Carney said that the first rate hike will rise sooner than expected after seeing another nice drop in UK unemployment.
US and UK central banking similarities
Both central banks had forward guidance regarding rate rises: they tied unemployment to hikes. Both central banks withdrew the guidance just before the targets were reached: 7% in the UK and 6.5% in the US.
Unemployment in the UK fell to 6.6% and in the US to 6.3%, now 0.4% and 0.3% below target, respectively. In both central banks, the focus gradually shifted to the timing of the first rate hike.
The UK is one step forward: it is not enlarging its monetary base: The UK Asset Purchase Facility stands at 375 billion pounds for a long time. The Federal Reserve is still buying bonds, but it is tapering the pace since December.
Will Yellen wait until QE to fully end before hinting about the timing of the rate hike and not making it obscure once again afterwards? Will the US follow the UK by making an explicit hint only after QE ends? Or will they act sooner?
In inflation, the US leads
The second mandate of the Fed, inflation, could prove otherwise. A lot has passed since Bernanke announced QE2 in order to combat the danger of deflation. Since then, some dovish FOMC members have warned about inflation being too low while the hawks have warned about excessive easing that could trigger inflation.
So far, inflation has been underwhelming, leaning more to the direction of the doves.
This may have changed now: Core CPI hit the magical 2% level. The Fed eyes this figure more than headline inflation, which just surpassed it with 2.1%. Both figures advanced gradually: this is not a one time event.
Even though this process is gradual, the Fed is likely to be careful. So while an explicit, Carney-esque statement is quite unlikely, the Fed could use its dot charts to hint a rate hike is coming sooner than later. Yes, Yellen tried to downplay the Fed forecasts and the dots on the chart, but if the dots representing rate hike expectations move closer to the present in the time chart, markets could certainly interpret this as a shift in gears.
What do you think?
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