Instant Analysis: FOMC Statement, July 2014
The FOMC Statement for July was barely altered from the June meeting, and the taper remains on track for a November 1 end to QE asset purchases.
The Committee decided to move ahead with another $10 billion reduction in monthly asset purchases to $25 billion per month starting in August. This is down from $85 billion a month in purchases before the tapering began in January. The reductions in asset purchases were again evenly split between MBS and long-term Treasury bonds. In August the Fed will be buying $15 billion a month in Treasury securities and $10 billion a month in MBS and agency debt.
Changes in the statement were mostly limited to the description of current economic conditions. The FOMC acknowledged that economic activity rebounded in the second quarter, i.e. labor market conditions improved with the unemployment rate declining further. But they inserted an expanded caveat, “A range of labor market indicators suggest there remains significant underutilization of labor market resources,” should anyone question whether they had changed their overall view of the labor market. Household spending is rising moderately, and business fixed investment is advancing.
The FOMC upgraded their assessment of current inflation acknowledging that inflation has moved somewhat closer to the Committee’s longer-run objective, and that the risks of persistently low inflation below 2.0 percent has diminished somewhat.
There was a surprising dissent from Charles Plosser, Philadelphia Fed President. He objected to the guidance that it will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time-dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.
In short, the language change on the labor market could be viewed as somewhat dovish by the markets, but that was equally balanced by the evolving view on somewhat stronger U.S. inflation trends and outlook. We see little change in the thinking from the FOMC in this statement.
The taper remains on track, and the first rate hike can be expected sometime in the second quarter of 2015, in our opinion. However, if the economy continues to gain momentum, the risks of an earlier rate hike from the Fed, perhaps late in Q1 2015, probably outweigh a delay at this point.