- Gus Faucher, senior economist at PNC Financial Services Group Inc.
Janet Yellen is facing a dilemma this week, as the FOMC will unveil its policy outlook and overall growth forecast. While policymakers were citing economic improvement as the main reason for tapering, sharp division over what happens to Fed's policy next year and growing political tensions are hanging over the outlook.
Moreover, Tuesday's set of data added more pressure on policymakers, as the number of building permits came stronger-than-expected, while inflation and housing starts surprised markets to the downside. The housing market is on the mend even despite mixed figures. Inflation, however, still remains a major concern, as consumer prices advanced only 0.1% in February, unchanged from January. On a yearly basis, prices slowed to 1.1% from 1.6% a month earlier. Core measure remained on both monthly and yearly basis. Even a 0.4% rise in food prices was not able to offset a decline, as gasoline prices declined for a second straight month. With inflation constantly below the official target of 2%, interest rates will most probably remain unchanged for the foreseeable future. Nevertheless, rising industrial output, resilient labour market and stronger consumer spending, are all bolstering the case the Fed will make another $10 billion revision to its monthly asset-buying programme. At the same time, any hawkish comments will push the buck significantly higher.
© Dukascopy Bank SA