Instant Analysis: June FOMC meeting

Scott Anderson
Posted by Scott Anderson
Chief Economist

The Federal Open Market Committee (FOMC) sees moderate economic growth in the second quarter, but lowered their forecasts for real GDP in 2015 due to a stagnant first-quarter performance.  The FOMC still sees the slow start to the year as transitory, and remains data-dependent on the timing of the first interest rate hike.

View from the street of the Federal Reserve building on a sunny day.The June FOMC statement was little changed from the April statement outside of a slight upgrade of current economic conditions. The June statement noted that “job gains picked up” since the first quarter, and a range of labor market indicators showed progress on the underutilization of labor market resources.  At the same time, the housing sector has shown some improvement.

Rate hikes expected to be very slow

The big news comes from another sharp downward revision in the “dot-plot” of the Fed funds rate path over the next three years, which kept a lid on Treasury interest rates and the U.S. dollar today, despite a generally upbeat assessment of the labor market and plans to move forward with interest rate hikes this year.

As expected, the FOMC wants to see further improvement in the labor market, and needs to be reasonably confident that inflation will move back to its 2% objective over the medium term, before it raises the Fed funds target rate range.   In other words, the September 2015 FOMC meeting is still the most likely date for the first interest rate hike from the Fed, but the timing is not assured and will remain data-dependent.

The June FOMC “dot-plot” still shows a median fed funds rate at 0.625% at the end of 2015 (two quarter-point rate hikes are implied by year end), 1.625% at the end of 2016, and 2.875% at the end of 2017.  This is about 25 basis points lower for 2016 and 2017 than where the median “dot-plot” was in March.  The pace of rate hikes are expected to remain extraordinarily slow by historical standards, or as Yellen says, “gradual.”

Eyes on September

Looking at the FOMC’s latest economic projections, the central tendency forecasts for real GDP in 2015 were revised down about 0.5%age points from where they were in March, but revised up about 0.1 percentage points for 2016 and 2017.  The unemployment rate projections for 2015 were also revised up by 0.2 percentage points, but remained unchanged for 2016 and 2017. PCE inflation and core-PCE inflation forecasts were virtually unchanged from the March projections.

Bottom line: the FOMC remains determined to raise the Fed funds target rate at least once this year, despite the disappointing first-quarter economic performance. If further improvement in the labor market materializes before September and inflation shows further signs of stabilizing, we can expect the first rate hike from the Fed at the September FOMC meeting.  Further rate hikes will remain data-dependent and gradual by historical standards.

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