Economic wrap: BoJ & Fed meetings' review - Westpac

Analysts at Westpac offered an economic wrap.

Key Quotes:

"Bank of Japan did not cut its policy rate and did not expand its asset purchase program, disappointing the expectations of many. In fact, the BoJ now no longer refers to the ¥80tn monetary base target. A new yield curve control policy (it wants to prevent further flattening) means by definition that the JGB asset purchase program can no longer be a hard target – some months they will buy a lot; some months they will not.

The BoJ now has an inflation overshoot framework and a commitment to make policy adjustments as appropriate to reach the target. There will likely remain nagging doubts about this given they haven’t come close to achieving let alone overshooting the target in the past. The commitment appears open ended and the BoJ is looking to hit its inflation target at “the earliest possible time”.

FOMC left policy unchanged. The statement and Chair Yellen, though, made clear that the “case for an interest rate increase has strengthened”, without committing to a specific meeting, while the dot plot shifted in a dovish direction throughout the forecast period. In summary, a hawkish hold in the statement and a dovish set of dots.

 The Fed made several key changes to its statement, all in a slightly more hawkish/constructive direction. The Fed now explicitly notes that, "Near-term risks to the economic outlook appear roughly balanced," a characterisation the Fed has eschewed from making for some time. That replaces, "near term risks have diminished."

The statement also inserted a fresh line indicating the possibility of a rate increase, borrowing from Chair Yellen’s Jackson Hole speech, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” This is entirely sensible, keeping the case for a December hike firmly on the table without fully committing to it.

The dot plot showed the highly anticipated dovish tilt. For 2016 the median dot is at one hike, down from two. That was always going to happen given there remains just one meeting this year where the Fed could feasibly lift rates – 14 Dec. Their next meeting, 2 Nov, is compromised by the presidential election a week later and in any case there is no press conference or fresh projections to help communicate a potential hike. There are three dots in favour of no change in rates this year, one might argue Bullard, Brainard, Tarullo or Evans based on recent commentary. That makes for quite a diversity of opinion - 3 favouring no hikes this year and 3 who favoured a hike today.

Economic Event Risks Today

The RBNZ is expected to keep the OCR on hold but to continue to explicitly signal a signal a cut in November via the key guidance sentence “…further easing will be required”. Economic growth and commodities are stronger, but the NZD is too high and inflation remains well below target.

Also watch out for headlines from new RBA Governor Lowe’s appearance before Parliament, ECB President Draghi’s speech at a conference in Frankfurt, and the Fed’s Lockhart speaking on labour markets."