Daily Insight Fed edging closer
Group Economics Macro & Financial Markets Research
Nick Kounis +31 20 343 5616 ,
30 July 2015
FOMC fails to provide a ‘smoking gun’ signal for a September rate hike… …however, it upgraded its assessment of the labour market and hinted it was getting closer Our base case remains for a September rate increase as we think data will remain strong
FOMC did not give a strong signal
market reports to show nonfarm payrolls continuing to rise
The FOMC decided to keep its target for the fed funds rate at
comfortably about the 200K mark, with unemployment trending
0-0.25% as was widely expected. It also failed to provide a
lower. Finally, we expect to see core inflation maintaining the
strong signal that rates would go up at the next meeting in
recent broadly stable trends, while the tighter labour market
September. Indeed, there was no ‘smoking-gun’ phrase in the
and stronger wage growth should make the Committee
statement. There was also no change in its assessment of
confident that underlying inflationary pressures will build further
risks to the outlook, which remained ‘nearly balanced’ rather
out. The recent declines in commodity prices and weak global
than shifting to just ‘balanced’. Finally, the decision to keep
manufactured goods prices signal some downside risks
interest rates on hold remained unanimous, with none of the
though, so this is something to watch.
hawks breaking ranks to vote for a rate hike this time round. It will be a slow rate hike cycle Still some signs that hike is closer
Once rates start to move up, the pace is likely to be very slow.
Although there was no strong signal, there were one or two
Indeed, the FOMC’s June projection implied that interest rates
signs that the Committee is edging closer to raising interest
will go up at a snail’s pace in coming years. Nevertheless, with
rates. It clearly upgraded its view on recent labour market
most other major central banks in easing mode, policy
developments. It judged that recent job gains were ‘solid’ and
divergence will be a supportive factor for the US dollar. Indeed,
unemployment had declined. Furthermore, it stated that ‘a
2y Treasury yields and the dollar eventually firmed on the
range of labour market indicators suggests that underutilisation
FOMC statement, which did not prevent equities from rising.
of labour resources has diminished’. Previously, at the June FOMC, it judged that slack in the labour market had diminished
FOMC individual rate projections at June meeting
only ‘somewhat’.
rate %
midpoint of target range level for the federal funds rate
4.5
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A one word change in the forward guidance Meanwhile, the FOMC made a subtle change in its language
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when describing the conditions necessary for it to start raising
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interest rates. In June, it stated that ‘the Committee anticipates that it will be appropriate to raise the target range for the
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federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will
2.5
move back to its 2 percent objective over the medium term’. In July it changed the first condition to ‘some further improvement
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in the labour market’. The word ‘some’ implies that the Fed judges that it is closer to this objective.
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Our base case remains for a September rate hike
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We continue to expect the FOMC to raise its target for the fed
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funds rate to 0.25-0.5% at the September meeting. This is based on our view that data will make the Fed more confident
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2016
2017
that it is on track to meet its objectives. In particular, we expect tomorrow’s Q2 GDP and revisions to paint a picture of an economy growing above trend. We expect the next two labour
Red dots indicate median Source: Federal Reserve
Longer run