The Federal Open Market Committee issued its latest statement today.
The vote to increase the borrowing target range by 25 bps to 1.00-1.25% from 0.75-1.00% was 8 to 1, with Minneapolis Fed president Neel Kashkari voting against the action, preferring no change in monetary policy. Kashkari also dissented at the March 15 meeting when the Fed last raised its target range.
While the minutes of the May FOMC meeting signalled that balance-sheet normalization plans were in the later stages of development and that officials wanted to update the Principles and Plans “soon,” many analysts assumed that the Fed would solicit additional feedback for a while longer. This was not the case, as the formal policy normalization plans were updated in an addendum. Policy makers aim to initially set the Treasury reinvestment cap at $6 billion per month and then increase the cap by $6 billion at three-month intervals over 12 months to a terminal pace of $30 billion per month. For agency debt and mortgage-backed securities, the cap starts at $4 billion per month and increases in steps of $4 billion (also on 3-month intervals) to a terminal pace of $20 billion per month. A reinvestment pace of $50 billion per month brings into question the notion that the balance-sheet normalization will operate “quietly in the background” in a boring fashion, as Fed officials aspire. It is yet to be determined how the markets will digest the “unconventional” monetary policy of QE-reversal. Economists were not entirely on point in terms of understanding the transmission mechanisms for asset purchases, so it is impressive to see such an implied degree of confidence regarding asset runoff.
In the official meeting statement, the general characterization of the economy saw changes in reference to both overall activity (“has been rising moderately so far this year” vs. “slowed”) and its components: employment gains “have moderated but have been solid” vs. “were solid, on average”; the description of household spending was more upbeat (“has picked up in recent months” vs. “rose only modestly”); while the characterization of business investment continued to strike an optimistic tone (“has continued to expand” compared to “firmed”).
The characterization of inflation was downgraded, given the recent deceleration in both headline and core metrics, however the description of inflation expectations remained intact despite broad-based evidence of eroding inflation expectations in various consumer surveys and market-based indicators. The statement specifically noted that “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.”
Guidance regarding the timing of the next rate hike remained ambiguous in the statement. Policy continued to be described as “accommodative” following the latest rate increase, and guidance that future hikes in the fed funds rate would be “gradual” remained intact.
Continued strengthening in the labor markets forced the Fed to revisit its expectations. In fact, only the projections for the unemployment rate had any meaningful revisions, with all years being lowered. The Fed now sees an unemployment rate of 4.3% in 2017, down from 4.5% prior. The rate is expected to slip to 4.2% in 2018 and 2019 from a previous expectation of 4.5%. The longer-run rate slipped to 4.6% from 4.7%.
To see the full statement, please click on the following link: