PREVIEW: FOMC July Decision at 1900BST/1400ET
The FOMC is expected to keep interest rates unchanged at this meeting at 1.00%-1.25%, after hiking rates in June. All analysts surveyed by Reuters expect the Fed to keep rates unchanged with markets currently pricing in a 97% chance of rates staying on hold. With no press conference from the Fed Chair Yellen or Summary of Economic Projections released at this meeting, focus will be on the accompanying statement for the Fed’s views on inflation and any timing on the beginning of normalising the balance sheet. Most analysts expect little change to the statement.
The previous statement said the Fed still expects inflation (PCE) to stabilise around the Committee’s objective of 2.0% in the medium term, although on a 12-month basis was still expected to remain below 2.0%. Deutsche Bank say the Fed “will need to acknowledge the further decline in inflation since the June meeting” but should keep their medium-term view unchanged. Since the last meeting, Yellen spoke to Congress and although she noted that it was mostly temporary factors holding inflation down, she said she “recognised the dangers of persistently undershooting the Fed’s 2.0% target.”
The Fed appears to be committed to shrinking its balance sheet, with most analysts expecting an announcement by the end of the year. The Fed’s most recent forward guidance has suggested that the start of balance sheet normalisation will be implemented in 2017, provided the economy evolves in line with expectations.
Most analysts are not expecting an announcement of the start date of balance sheet normalisation at this meeting but there could be a tweak in the language. HSBC say the Fed could announce that they will begin balance sheet normalisation “relatively soon”, opening the door for a September announcement, to begin shortly after. In her semi-annual testimony to Congress, Yellen said she “expects balance sheet reduction to begin soon”.
Even if the Fed do announce a change to the balance sheet policy, they will likely attempt to minimise the impact this will have on financial markets by saying the process will be gradual, similar to the guidance on interest rates.
Overall, this meeting should not be a game changer as the Fed tend to communicate changes to policy relatively far in advance and there has been no indication that they will venture too far from the script at this meeting. Barclays say that “an announcement on balance sheet normalization in July would leave open the possibility of two additional rate hikes this year. This would likely send a more hawkish signal than warranted given the incoming data on activity and, in particular, inflation.”
As a reminder, there is no press conference from the Fed Chair Yellen or Summary of Economic Projections released at this meeting.
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For a summary of what the banks are saying on this meeting, please click here