It is a rare July meeting that the Federal Open Market Committee would launch a major new policy initiative, and we doubt the statement this coming Wednesday afternoon will deviate from that summer template.
A few quick points:
** We still anticipate the September meeting, not July, will be when the FOMC formally announces the start to its balance sheet normalization policy, with the first partial run-off of maturing assets in its System Open Market Account in October. We do not think they will announce an immediate start in July for a roll-off soon after. When a central banker says something like “soon,” the trading market may hear “immediate,” but for the Fed officials, they mean within the next quarter or so.
** So we would expect the July statement to signal the approaching start to the balance sheet normalization with the adoption of perhaps more declarative language along the lines of “will” begin instead of “expects” to begin, or to note it likely to start “in the coming months” or “coming meetings” instead of “this year.” The Committee is very likely to keep the safeguard caveat in there that the anticipated start will depend on the economy evolving as forecast.
** Arguing against an immediate start is the prior pattern in launching such a major policy move, be it the start to QE, the taper, or the rates-lift off, is a two step process: first to reach the policy consensus internally, and followed with a long runway of messaging to ensure there are no surprises and that markets here and abroad, as well as the US Treasury and foreign central banks, are all well prepared.
** And on rates, we doubt there will be any substantial change in the language beyond the updated descriptive first paragraphs on the economy and outlook. They will again acknowledge the persistence in low inflation, but they will probably leave the inflation language pretty much unchanged. The Committee is not yet ready to offer any overtly dovish signaling on its rates normalization policy. Not yet anyway.