Highlights:
- As expected, the target range for the fed funds rate was left unchanged at 1.75-2.00% in a unanimous decision.
- In a nod to Q2’s impressive GDP growth, the Committee noted economic activity is rising at a “strong rate,” compared with “solid” in June’s statement. Consumer spending and business investment were also characterized as strong.
- Job gains were also noted to be “strong” and the unemployment rate “stayed low,” despite ticking up to 4.0% in June from 3.8% in May. Both core and headline inflation “remain near” 2%.
- The Fed’s latest Beige Book report indicated manufacturers across the country are concerned about tariffs, with many reporting higher prices or supply disruptions. But trade tensions didn’t feature in today’s statement, with the Fed simply keeping an eye on “international developments.”
Our Take:
Today’s Fed meeting was fitting for the lazy days of summer—no rate change and only minor tweaks to the policy statement reflecting the latest data. Chair Powell will be conducting press conferences after all eight FOMC meetings starting next year, but for now these interim meetings continue to be non-events. The few changes in language today leaned hawkish, a sign the next rate increase isn’t far off. Looking ahead to September, the case for a hike is strong. GDP growth accelerated sharply in Q2, and while we doubt the add from exports will last, firmer domestic demand looks set to persist near term. Core PCE inflation is holding close to the Fed’s 2% objective and core CPI is running slightly firmer. The labour market remains strong, and while it would be a stretch to say wages are taking off, pay growth has picked up this year. Tariffs remain a risk to the outlook, though the Fed’s scant mention of trade issues today speaks to their limited impact thus far. Some caution might be warranted if tensions ratchet up significantly, but for now a strong domestic backdrop and sizeable fiscal boost argue for less accommodative monetary policy. We expect two more rate increases over the second half of the year, and look for 100 basis points of hikes in 2019 as well.
