To almost no one’s surprise, the Federal Reserve’s Federal Open Market Committee (FOMC) changed no policy rates and it kept its policy concerning its balance sheet unchanged this week.
Not everyone was pleased. There were three dissents, all by bank presidents who wanted a 25 basis point hike: Esther George, Loretta Mester and Eric Rosengren. Rosengren was a bit of surprise since he used to be thought of as “dovish.” It was the largest number of dissents in two years. The degree of dissent should push the FOMC to act soon.
The policy statement changed in an important way. “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. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."
The FOMC made an important change in that it deleted a statement that said, “near-term risks to the economic outlook have diminished.” It added an assessment which said, “near-term risks to the economic outlook appear roughly balanced.” Such a revision is a signal about the odds of tightening.
There was also a tightening signal from the “dots” in the Summary of Economic Projections¹, in which the majority of FOMC members forecasted a higher fed funds rate target by end-of-year.
I am not surprised; I was expecting this. The FOMC is preparing the ground for a hike this year. It doesn’t want to surprise markets. At the same time, the FOMC gave itself “wiggle room” to not tighten if the data takes a turn for the worse. The statement appears to be a bit more “dovish” than the market was expecting.
There were few changes in the assessment of the economy. First, the FOMC noted the that payroll growth has been “solid, on average.” Second, the FOMC noted that the growth of economic activity has picked up from the first half of the year. On the whole, the FOMC gave an assessment that was a touch more upbeat than the last statement but not greatly so. The FOMC made no mention of global financial issues.
There were no changes regarding the assessment or forecast of inflation.
The next meeting is November 1-2, 2016. I think someone messed up the calendar, the Fed is not to going to tighten six days before the election! This election may be close and it has caused uncertainty; financial markets could be very unsettled in the next seven weeks. The Fed does not want to be under a political spotlight. I don’t know what the hawks will do; they may be satisfied with a stronger signal about an imminent tightening.
The next FOMC meeting after that is December 13-14, 2016. That meeting will give us an update on the Summary of Economic Projections and a press conference with Federal Reserve Board Chair Janet Yellen. Our team’s view is that the Fed will hike policy rates at that meeting. It will be just as relevant what guidance it may offer for hikes in 2017.
In this context, it is notable that the “dots” for all years were trimmed. Obviously, the projected funds rate for end-2016 was trimmed by 25 basis points. But the end-2017 and end-2018 rate targets were both trimmed by 50 basis points. The FOMC median voter seems to expect only two hikes in 2017; that is our view also. The long run rate was also trimmed.
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¹ The"dot plot" is part of the FOMC's Summary of Economic Projections. It provides FOMC participants’ assessments of appropriate monetary policy. It shows the midpoint of target range or target level for the federal funds rate out through 2019.
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