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When the Federal Reserve meets this week, there is little doubt of the outcome. This deflects investors’ attention from a change in policy to a change in the forward guidance, subtle and otherwise. The Fed will indicate that its highly accommodative stance is still needed. It seems to want that to be the main take-away.

However, what will likely be evident from the forecasts is that there is an increasing sense that the Fed’s goals of full employment and stable prices is being approached. This must be the case as officials begin to prepare investors for the next phase monetary policy.

Unemployment forecasts will likely be lowered as May’s 6.3% rate was already into the Fed’s year end forecast made in March (6.1%-6.3%). If there is a change in the core PCE forecasts, it will more likely be higher than lower. Quantitative easing has caused, helped facilitate, or has been irrelevant, to the recovery of employment and arresting the disinflationary forces (depending on one’s point of view). It will end in a few months.

This does not alter the fact that the Federal Reserve will have to recognize the growth was a significant disappointment in Q1. As a pure accounting function, it will have to cut this year’s growth forecast (central tendency) and dramatically from the 2.8%-3.0% indicated in March. The outer years may also be cut signaling a step toward greater realism from the persistent optimism that just as consistently is revised lower.

There is a committee meeting at the Bank of England June 17, but it is not the Monetary Policy Committee. It is the Financial Policy Committee, and it is through this forum that macro-prudential policies arise. Officials see the housing market as the biggest risk to financial stability.

Despite, or what some cynics may say, because of the IMF’s recent call for to cool the UK housing market, after recently retracted its publicly expressed doubts over the government’s economic strategy, new steps are unlikely to be taken yet. The issue is whether the rise in house prices reflects a growth of risky mortgage debt. It is at least a debatable point as household leveraging appears to have fallen.

There are at least two other forces that seem to be operating. First, the London property market has become an asset in international portfolios. This may loosen the link between the local economy and house prices. This the the real challenge to the likely macro-prudential strategy. 

Second, unlike in the US, and many other countries that had housing booms, the UK has a shortage of houses. The fact that house price increases are concentrated in the south may also reflect where the effective demand is located, which in turn may be an issue of the wealth and income disparities.

Minutes from the MPC meeting earlier this month will be released. Carney’s comments last week may have stolen some of what may kindly be thought of as thunder from the minutes. The tone of the debate is likely to shift in terms of economic slack and timing of the first hike. However, the market reaction to the minutes will likely be most dramatic if there is a dissent. Sterling would likely rally, and short-term interest rate futures would sell off (higher interest rates).

A dissent would likely fan speculation that the first rate hike could take place before the end of the year. We continue to favor the first move in Q1 15. Earnings growth remain pitiful despite the increased employment. It is difficult to be too concerned about inflation when wage growth is so meager. Given the difficulty in measuring economic capacity, especially when such a large part of the economy is services, the benefit of the doubt should be given to slack in lieu of price pressures.

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