As was expected, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC) decided to keep rates unchanged at the conclusion of its two-day meeting (see today’s statement). In addition, here is a side-by-side comparison of the statement released today versus the statement released on July 27, 2016.
The FOMC upgraded its assessment of the economy versus the July statement, and notably, said that the “near-term risks to the economy are roughly balanced,” an upgrade from July’s assessment that the “near-term risks had diminished.” The statement did use the phrase, “monitor inflation indicators and global economic and financial developments” again, as it has in every FOMC statement this year. Fed Chair Janet Yellen did not use this phrase in her speech in late August at Jackson Hole, WY, so it is somewhat surprising that it found its way back into the statement this time.
The Fed did drop a fairly strong hint that a rate hike later this year is in prospect, as the statement said, “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”; but also mentioning that such a hike is, as always, data dependent. This language suggests to us that barring a very bad run of economic data between now and December; a surprise out of the U.S. election, the Brexit negotiations, or China as it deals with its bad debt problem; or even a major terror attack that would disrupt economic activity over a wide area for a long period of time, the Fed is likely to raise rates at the December FOMC meeting. Given that the next FOMC meeting in on November 1–2, just days before the presidential election, it is very unlikely the Fed would raise rates then.
The Fed also released a new set of economic forecasts and dot plots at this meeting, as it does four times a year. The key takeaways here are that FOMC members now think the Fed will hike rates just twice in 2017, down from three hikes embedded in the June 2016 dot plots. The long run fed funds rate—what the Fed would consider neutral—dropped from 3.0% in the June 2016 dot plots to 2.875% today.
The next key event for Fed watchers is a speech by Yellen in late September at a Kansas City Fed event. The minutes of today’s meeting will be released on October 10, 2016. The next FOMC meeting is on November 1–2, 2016. There will not be a press conference or a new set of dot plots or economic forecasts released at that meeting.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms.
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