FOMC July Meeting – Three things we have learned

Jul 27, 7:52 am
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The two-day FOMC meeting concluded yesterday with the release of the monetary policy statement. With no press conference scheduled, the markets were widely expected to see no changes. As expected the US Federal Reserve kept the policy rate unchanged. The Fed also maintained that it would keep monetary policy accommodative.

The FOMC statement showed that the central bank would begin its balance sheet normalization “relatively soon.”

The US dollar was seen weakening after the FOMC statement sending its peers to fresh multi-year highs. The common currency, euro rose to a new three-year high earlier today, while the price of gold also posted a strong rebound, rising to a new one-month high.

The markets were prepared to hear some hawkish remarks from the Fed, however, the fact that central bank’s statement focused on the inflation concerns saw investors scale back the odds of further rate increases.

The central bank maintained that monetary policy would remain accommodative, consistent with the Fed’s previous message that the current rate hike cycle was a dovish one. Furthermore, with the interest rate staying at a neutral rate, the Fed is also not compelled to act.

Meanwhile, uncertainty remains as to who the next Federal Reserve President is going to be. Janet Yellen’s term ends in February 2018. So far, the other contender for the top job at the central bank is Gary Cohn.

Here are the three key points from the FOMC meeting yesterday.

Balance sheet normalization

As expected, the Fed noted that it would start the balance sheet normalization process soon. It is expected to start in September, although the central bank did not give any specifics on the timing. The Fed, however, noted that the process would begin provided that the economic activity in the US evolves.

The balance sheet normalization comes after the Fed began to purchase assets that included US Treasuries and Mortgage-Backed-Securities (MBS) as part of its quantitative easing program or QE.

The Fed’s balance sheet is approximately $4.5 trillion. The amount is amassed over a six-year period that followed the 2008 crisis. The Fed eventually put an end to the QE program in late 2014.

Fed funds rates unchanged at 1.0% – 1.25%

As the markets expected, the FOMC decided to leave the short term fed funds rate unchanged within the range of 1% and 1.25%.

The last rate hike was in June this year, where the Fed hiked interest rates by 25 basis points. This rate hike came nearly two months later in March when the fed funds rate was raised to 1%.

[Tweet “The odds for a rate hike for the remainder of this year fell to around 47% after the FOMC’s statement.”]

Since the beginning of the tightening cycle in December 2016, the Fed has raised interest rates four times so far. Officials projected that another rate hike would be possible before the turn of the year.

However, the odds for a rate hike for the remainder of this year fell to around 47% after the FOMC’s statement.

Inflation could run below the 2% target

The FOMC’s statement that was broadly responsible for a weaker sentiment in the U.S. dollar was the obvious reference to inflation.

The FOMC statement said, “Inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term, but should stabilize around the FOMC’s 2 per cent objective over the medium term.”

Various measures of inflation in the past year showed that consumer prices had risen just 1.4% after briefly rising to 1.9% in January this year.

The Fed continues to remain puzzled on whether the weakness in consumer prices was temporary, given the fact that the US unemployment rate continues to remain at historical lows.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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