The Fed's outlook for growth through the rest of the year is pessimistic, dollar drag likely

The latest Fed projection for 2015 4Q YoY GDP growth was a surprisingly low 2.1%. Given what we know about growth in the first and second quarter of this year, we can back out the implied average growth rate for the second half. The result: the Fed only expects QoQ annualized GDP growth to average 2.0% in 2H15, well below expectations for just under 3% growth, and that of the economists' consensus.

"The Fed is in part concerned about the strain from a stronger dollar and weaker global growth. Although it is challenging to gauge the exact drag, most economists would agree on a GDP hit of around 0.5-1.0ppt from a 20% USD appreciation. This is consistent with our views", says BofA Merrill Lynch.

Indeed, NY Fed president Dudley has cited a 0.6ppt hit to GDP growth from a 15% appreciation. However, there is less agreement on the duration of the shock and its dispersion across quarters. The Fed's forecasts and comments from Vice Chair Fischer in late August suggest either a persistent shock, or expectations that further dollar strength will create new headwinds.

"A glance at the data suggests a sharp hit has already been felt. In 1Q15, net trade exerted a 1.9ppt drag to annualized GDP growth, with a 0.9ppt drag in 4Q14. However, trade is also impacted by relative growth of the US and its trading partners. The quarterly numbers are very volatile, but the shutdown's greater hit to imports should have actually boosted 1Q net trade", added BofA Merrill Lynch.