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Macroeconomics and Psychology

Macroeconomics, Psychology, headwinds, US economy, PCE deflator, fx trader, forex-globalization-business-entrepreneur-networking

There is a broad consensus around the macroeconomic picture. The headwinds slowing the US economy in H1 16 have eased, and above trend growth in H2 16 appears to be carrying into 2017. Q4 16 GDP is expected to be revised to 2.1% up from 1.8%. Many economists appear to accept that a good part, though not all, of the decline in the estimated trend growth in the US, is a function of demographic considerations.

Price pressures are gradually increasing, though the Fed's preferred and targeted measure of inflation, the core PCE deflator is likely to have remained at 1.7% in January, the base effect warns of topside risk in the coming months.  Meanwhile, the labor market continues to improve. The four-week moving average of weekly jobless claims fell to a new cyclical low the same week the BLS conducted the survey for non-farm payrolls, which will be released on March 10.

The Federal Reserve raised rates once in 2015 and once in 2016. This year will be different. The shift in opinion is not so much in the increase of the likelihood of a March increase or June increase, but in a move in May. As we have noted, the advantage May is that it would be part of the normalization process when every meeting must be live. Up until now, there was a general recognition that Fed action would take place at the quarterly meeting that had the economic forecast updates and was followed by a press conference.

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