As was widely expected, the Federal Open Market Committee (FOMC) kept its federal funds target rate unchanged at between 1¾ and 2 percent.
Overall, there were very few changes in the statement compared with the last one in June. The statement noted that economic activity has been rising at a “strong” rate, an upgrade from solid in June. In fact, if describing the economy in just one word, according to the Fed, it would be “strong”. The statement used the descriptor five times.
The statement’s forward looking language remained unchanged. The FOMC “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term”. Risks remain balanced.
Key Implications
Go back to enjoying your summer vacations, there was little change in the FOMC’s August statement. As expected, the FOMC took summer break from hiking rates. After the FOMC had made more significant changes to the statement back in June, the only changes in August reflected the incoming data, with the economy now described as “strong” five times, up from four in June. As for the qualifier “for now” that had crept into the Chair’s testimony earlier this month with regards to “further gradual increases in the target range for the federal funds,” it did not appear in the formal statement.
With no update in the FOMC’s economic projections, and little change in the tone of the statement, the Fed likely expects to raise rates in two more 25 basis point steps this year as outlined in its June projections. Stronger economic data since then has likely increased its comfort with that view. The U.S. economy is booming, and the labor market is tight. Inflation is at target, but not yet showing signs of a more notable acceleration. Add it all up, and it makes sense for monetary policy accommodation to continue to be removed, but there is little urgency for the Fed to pick up the pace from what was outlined in June. We expect two more 25 basis point hikes this year, with the next one in September.
