Macro Highlights: surprises from the Fed and SNB, limited options for the BoE

Macro Highlights - 12/20/2016

The US Federal Reserve has increased the fed funds rate. It has also raised its rate hike forecast in anticipation of the changes that will come following Donald Trump’s election. This latter move could help hold inflation expectations in check. For the Swiss National Bank, the negative effects of the franc’s strength against the euro are offset by the rising dollar, but the SNB could still intervene on the market. The Bank of England is caught between a rock and a hard place.

As we expected, the Federal Reserve raised the fed funds rate by 25 basis points to 0.75% at its 14 December meeting. It noted in its press release that the rise was driven by current and expected labour market and inflation conditions.

The members of the Federal Open Market Committee (FOMC) also raised their rate hike outlook. They now forecast three increases in the fed funds rate in 2017 versus two previously, and their estimate of the long-term equilibrium fed funds rate rose to 3.00% after falling from this level to 2.875% in September.


When asked about the changing interest-rate outlook, Fed chair Janet Yellen acknowledged that the prospect of fiscal stimulus led some members of the FOMC to change their estimates. In terms of GDP growth, the FOMC members raised their forecast for 2017 and 2019 but did not change their long-term estimate of 1.8%. They also stood by their previous inflation projections.


Analysis and implications:

  • In raising its forecast of future borrowing costs, the Fed is clearly taking into account expected changes following Donald Trump’s election. But the FOMC members’ unchanged stance on long-term GDP growth reflects caution, which is understandable given the uncertainty surrounding the actual policies that the new administration intends to enact. In the future, if the stimulus programme is able to boost productivity, the FOMC members will probably also raise their long-term GDP growth projection.
  • The Fed’s revised interest-rate outlook also shows that it is less worried about the strength of the dollar. In its view, widespread belief that the fed funds rate and the dollar will continue to rise will help keep inflation expectations in check and, as a result, prevent long yields from going too high.
  • We believe that the FOMC members’ revised borrowing cost projections were driven mainly by a desire to tamp down inflation expectations, which have been rising since November. On the down side, we feel that the strong dollar and the recent upturn in long-term yields will weigh on GDP growth in H1 2017. The impact of the boost in fiscal spending is not likely to be felt until the end of 2017 and in 2018 (see our new Macroeconomic Forecasts[1]). Given these factors, we think the Fed will remain cautious: we still forecast only two 25-basis-point increases to the fed funds rate in 2017.


The Swiss National Bank (SNB) held its quarterly monetary policy meeting on 15 December and, as expected, kept its interest rate on sight deposits unchanged at -0.75%. But it unexpectedly changed its message regarding the currency markets.

While it reiterated that the franc was overvalued and that the SNB continued to intervene on the currency markets as needed, this time around it added that its decisions to intervene would now take “the overall currency situation into consideration”. At the press conference following the meeting, Chairman Thomas Jordan noted that “On a trade-weighted basis, the real external value of the franc hardly changed over the course of the year. An analysis of nominal exchange rates since our last assessment in June shows that the franc has appreciated slightly against the euro. Against the dollar, meanwhile, it has depreciated somewhat”.

Analysis and implications:

  • This change in the SNB's message suggests that it could tolerate, at least temporarily, the current exchange rate (CHF/EUR: 1.075) despite the franc’s recent uptick against the euro, because the strength of the dollar partially offsets the negative aspects of the franc’s rise against the euro.
  • The SNB could even scale back its interventions on the currency market in the coming weeks as its foreign currency reserves expanded by nearly 13% between January and November 2016 to CHF 648 billion.
  • We still think that the SNB will prevent the euro from losing much more ground to the franc. The SNB could step up its currency market operations if the euro weakened further, a distinct possibility in view of the upcoming elections in Europe. Furthermore, now that the European Central Bank (ECB) has announced its plan to keep its quantitative easing policy in place throughout 2017, the SNB can be expected to stick to a highly expansionary policy so as to avoid adding any further upward pressure to the franc. Mr Jordan confirmed this when he noted that the benchmark rate could be lowered if necessary.


On 15 November, the Bank of England (BoE) announced that it would keep its Bank Rate at 0.25%, and it did not change the pace of its quantitative easing programme. In its statement, it acknowledged the recent rise in the pound's trade-weighted exchange rate (which rose by 6% since the 3 November meeting). It noted that, as a result, it had trimmed its inflation forecasts below the levels published in its November Inflation Report. The BoE added, however, that it still expected inflation to be above the BoE’s 2% target at the end of 2017 and in 2018.

Analysis and implications:

  • Reprising a theme of its November meeting, the BoE is still worried about inflation in the event the pound falls any further. In our view, the BoE’s options are now limited. Despite the slowdown in economic activity that we foresee, the BoE cannot lower its benchmark rate any more or add any further significant monetary loosening measures to its arsenal.


[1] “Macroeconomic Forecasts # 2: the global economy also needs to make productivity gains”

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