Markets’ expectations for any changes in Federal Reserve (Fed) policy were low heading into this month’s Federal Open Market Committee (FOMC) meeting, and the Fed didn’t disappoint. As was widely expected, the Fed chose to leave the overnight discount rate at its current level of between 1.0% and 1.25%. The language of the statement was also little changed (click here to view a side by side comparison), with the Fed’s view of the labor market, household spending, and business fixed investment remaining positive. The Fed had downgraded their view on inflation in June and kept similar language in the July report. Given that so little was changed, the fact that the Fed made a slight wording change to say that inflation is “running below 2 percent,” as opposed to last month when they indicated it was “running somewhat below 2 percent,” could get some press, but the change is insignificant in our view.
Last month, in addition to increasing interest rates, the Fed provided details of their balance sheet normalization plans for the first time (see our June FOMC meeting blog here). However, the Fed didn’t give a hard timeline for the start of the program. Markets were watching closely for any hints regarding when balance sheet normalization may begin, but received little in the way of new details, stating that “the Committee expects to begin implementing its balance sheet normalization program relatively soon.” This could be viewed as slightly dovish, as not giving a date may indicate that the Fed didn’t want to rock the boat in the absence of a press conference to elaborate on it. However, it will likely do little to change market expectations of a September announcement.
Regardless of when it starts, the immediate impact of normalization is likely to be limited given that it will start with allowing just $10 billion ($6 billion of Treasuries and $4 billion of mortgage-backed securities) of maturing bonds to roll off the $4.5 trillion balance sheet each month. However, these amounts will increase over time until the total roll off reaches $50 billion per month as detailed in the Fed’s Addendum to the Policy Normalization Principles and Plans.
Though markets received little new information from this Fed meeting, there will be plenty of Fed speak to digest between now and the next meeting on September 19–20. In addition to a number of speeches by individual FOMC members, the minutes of today’s meeting are expected to be released on August 16, and the Kansas City Fed’s widely followed Jackson Hole Symposium will be taking place August 24–26.