As expected, the Federal Open Market Committee’s June statement on monetary policy and the accompanying SEPs (Summary of Economic Projections, or the “dot plots”) signaled a subtle change from that of April, suggesting that we are on track for a rate hike this year. The Committee improved its economic outlook, but did not change its tone regarding inflation and inflation expectations. The SEPs suggest a revision downward in 2015 growth estimates (from 2.3-2.7% to 1.8-2.00% real GDP growth), reflecting a mark to market of the weak first quarter. Expectations for the year end federal funds rate were slightly more dovish (at the margin), but expectations for the long run federal funds rate were unchanged at 3.75%.
The Committee’s statement:
– Altered the language referring to economic growth from “economic growth has moderated somewhat” to “economic growth has been expanding moderately”.
Since the last meeting, the data has improved. Specifically, Nonfarm Payroll has averaged 250K for the last two months, versus the March reading of 120K, and average hourly earnings growth moved higher, towards 2.3% (the high of the last five years). On the economic front, retail sales rebounded strongly in May with core sales increasing 0.7% and upward revisions to both April and March. Finally trade rebounded, as the effects of the West Coast port shutdown fade.
– Retained the language noting that “inflation continued to run below the Committee’s longer-run objective”.
Since the April meeting, core CPI remains essentially unchanged at 1.8%, while core PCE has declined from 1.3% to 1.2%.
– Removed the language regarding first quarter slowdowns in output and employment growth, but retained its expectation that “economic activity…[is] continuing to move towards levels the Committee judges consistent with its dual mandate”.
– Reiterated its view that below-normal rates may be needed for some time.
– Reiterated that the timing of the initial hike remains data-dependent.
Over the near term, we expect:
Over the medium/longer term, we expect: