As widely expected, the Federal Open Market Committee (FOMC) held the target range for the federal funds rate unchanged between 1 and 1-1/4 percent.
The Fed’s views appear to have changed very little from the mid-June meeting round, with only minor wording changes in the policy statement.
The Committee upgraded its view of the labor market, removing the previous reference to a moderation in hiring, instead highlighting that job gains have been “solid.” Household spending and business investment were also viewed as having expanded.
The Fed had previously communicated that overall inflation declined and the core metric was running “somewhat below” 2%.This wording was changed, with both the overall and core metrics viewed as having declined in today’s statement. Moreover, the FOMC removed the “somewhat” qualifier, suggesting that the magnitude of the divergence from target is greater.
The Fed changed its forward guidance on policy, indicating that it will keep reinvesting MBS and rolling over Treasuries “for the time being,” expecting the normalization program to start “relatively soon.” No new details on this were provided above and beyond what was communicated in the Addendum in June.
This was a unanimous decision, with Kashkari (FRB Minneapolis) voting with the Committee once again, after dissenting in June.
Key Implications
There was not much here to work with as far as clues to Fed thinking with the Committee only tinkering with the words a bit.
The Fed’s take on the economy appears relatively sanguine, with the current momentum seen as improved after some moderation earlier in the year. However, the Committee’s views of inflation took a dovish turn, with the Fed acknowledging that both headline and core metrics have declined and are no longer running just “somewhat” below 2%.
Having said that, the Fed does not appear to be willing to alter its plans, at least as far as balance sheet normalization is concerned. The statement’s wording that reinvestments/roll-overs will only continue “for the time being” with balance sheet run-off expected to start “relatively soon” suggests that the Committee is readying to initiate balance sheet normalization at its September meeting, with the run-off starting the following month.
