The intended takeaway from the Federal Open Market Committee’s statement this afternoon was neatly in line with what we suggested earlier this week to expect, that the path remains clear for a policy normalization and all that it means for a rate hike “sooner” rather than later, albeit while studiously avoiding any near term date-specific guidance.
The labor market has “strengthened” with a “strong” rebound in June, while “strong” household spending has done the same, with only the continued no-show of “soft” business spending holding things back; inflation remains lower than desirable, but don’t worry about it for now; indeed, as the Committee notes in the new July insert, “near-term risks to the economic outlook have diminished.”
If you assume for a moment the economy continues along this path beyond the summer – which the Fed believes is the base case scenario – use your imagination on what it suggests about a rate move before year-end.
We would have been very surprised if the FOMC had completely gone back to a balance of risk assessment, as most of the Committee wanted to move on from that. They were well aware going into the meeting this week that if they were any more specific in using the same loaded language of “nearly balanced” or “balanced,” it would have excessively hawked up the July statement.
We would suspect the diminished near-term risk insert was mostly meant as a statement of the obvious – the near risks have diminished, thank you very much – and it could have been to tempt Kansas City Fed President Esther George out of a dissent. As it is, c’est la vie, she was going to dissent anyway without a hike, and the market could care less.
So yes the FOMC is in effect saying watch the data because you never know, the data and conditions may evolve in a way that makes a September move more likely. But by all means don’t take that forewarning too literally as this July language was hardly meant to tee a rate hike up anything like the October statement last year, which was meant to prep market pricing for a hike that was all but certain to come in December.
That is not the case here, and so we will have to wait till Jackson Hole for the next signal of the FOMC’s policy leanings. But we do think, as we last wrote (see SGH 7/12/16, “Fed: The Emerging Post-NFP Consensus”), a December rate move is far more likely than not, assuming as always, the data doesn’t turn south.