Consistent with our and the market’s expectations, the Federal Open Market Committee (the FOMC) left the Fed Funds rate unchanged, at 0.25%‐0.50%. Despite the inaction, the Statement and Summary of Economic Projections provided fireworks for what was expected to be a rather benign event.
The FOMC decided the most prudent approach to formulating the September statement was to keep the outlook for the US economy positive, but indicate that further evidence was needed to enhance their case before another rate increase. The overall tone of the information released today was mixed. Some parts of the statement struck a more hawkish tone: near‐term risks were considered balanced, three regional bank presidents dissented and the case for tightening “has strengthened.” On the other hand, the Summary of Economic Projections indicated a much slower pace of rate tightening (particularly in 2017), the median forecast for core inflation in 2017 was downgraded, and three FOMC members saw no additional rate hikes as appropriate this year.
We can break the Committee’s statement into three parts:
Finally, three members of the committee, Esther George, Loretta Mester, Eric Rosengren (Presidents of the Kansas City, Cleveland and Boston Federal Reserve Banks) dissented in favor of a rate hike at this meeting. While this is not the first time Ms. George has dissented from the broad group, Mester and Rosengren dissented for the first time. Rosengren’s dissent was particularly surprising given his tendency to focus on downside risks.
The Summary of Economic Projections showed marginal changes on the economic front. The Fed’s long‐run forecasts on potential GDP were downgraded (0.2%), however the path toward achieving their other objectives remained roughly similar to the June submissions. The FOMC also reduced their expectations for GDP growth in 2016, which reflected more of a mark‐to-market after a rather weak H1. The Fed continues to see further improvements in the unemployment rate, despite the recent leveling off. The path of inflation was little changed, but the FOMC is closer to achieving their 2% objective. The Fed also released the “Dot Plot”. With the introduction of 2019 forecasts, the path of the Fed Funds rate is even flatter than previously communicated. The median long‐run Fed Funds rate was reduced by 0.125% to 2.875%. The 2016 forecast reflects only one rate hike by year end. The expected tightening in 2017 was slashed by 0.5% and the forecast is for only two rate hikes over that time period.
At the press conference, Chair Yellen remained a bit more optimistic in light of recent labor market developments, the lack of follow‐through from the EU referendum, and a desire to achieve a rate hike before year end. The Chair suggested the Fed could remain more accommodative in future years to achieve their medium term objectives. With short‐term rates near zero, an inflation overshoot could be managed more effectively than a slowdown in the economy.