Well, that was a bit boring after all the build-up. There are no overt or explicit signals about September in today’s Federal Open Market Committee statement, as we and just about everyone else expected, though judging by the market’s initial reaction, many may have come around to hoping for a more explicit hawkish signal just to make August more interesting.
But as much as the FOMC is determined to be out of the forward policy guidance business, they cannot do so cold turkey, and we believe the statement is sprinkled with slivers of wordsmithing to indicate the lean of the Committee consensus on the near term policy path, one which we have been saying too many times to repeat now is tipping increasingly towards a September meeting first rate hike.
So two quick points:
First, there is a new modifier in the wording that did leap out to our eagle eyes and that was the addition of a “some” in what is left of the guidance section a few grafs down from the top: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Ok, it is not a lot to hang your hat on, but for this increasingly guidance-averse FOMC, it is probably a big deal. It now raises the question of just how many more 200k plus Nonfarm Payrolls will it take to equal a “some” that means we are indeed at the moment of a hike?
Not a lot, we think, and in fact at this point in the recovery, our sense is that even were the job numbers to drift below 200k a month in one of the prints before September that would still be good enough for an FOMC we think is getting restless to start policy normalization. In other words, this FOMC would only worry or become more hesitant on a faltering momentum, and does not necessarily need to see even better labor market numbers or higher growth.
Second, the statement is also best read for what they chose to keep out. For all the commentary and ink spilled on China woes or renewed commodity and oil price declines, there was no mention or upgrade in acknowledgement of the risk of either. The energy price declines are still seen as “transitory” and the current down-leg in inflation is still primarily driven by “earlier” energy price drops, all of which is still expected to “dissipate.” They are still monitoring international developments. Period.
Otherwise, as expected, the descriptive first paragraph was sprinkled with upgrades to the outlook, the labor market is showing “solid” job gains, housing drew a positive note in that it showed “additional” improvement, all in an economy that continues to be “expanding moderately.”