Instant Analysis: July FOMC statement
The July Federal Open Market Committee (FOMC) statement didn’t give economists and markets much more to go on about the expected timing of the first rate hike from the Fed. There were no clear hints of a September rate hike buried in the statement. In short, the FOMC remains data-dependent, as they were in June.
My analysis is that the FOMC is still inching toward a rate hike this year, but wants to see some more labor market and inflation data before it pulls the trigger. I see no reason to change my call for a September rate hike at this time.Signals behind cosmetic changes
Indeed, there were a few cosmetic changes to the statement that one could interpret as the Fed laying the ground work for a rate hike as early as the next meeting. It upgraded its assessment of the economy, citing solid job gains, declining unemployment, and additional improvement in the housing sector.
They also added the qualifier “some” to its policy guidance. The statement now reads that the FOMC wants to see “some” further improvement in the labor market and must be reasonably confident that inflation will move back to their 2.0% objective over the medium term. This qualifier was likely placed there on purpose to signal that the FOMC is closer to where they need to be to hike rates — an important milestone that should not be discounted out-of-hand, and could indicate rate action from the FOMC as soon as September.International risks downplayed?
Finally, there was no mention of international risks, financial market volatility in China, or global growth concerns, suggesting to me that these downside risks to the U.S. economy do not yet reach the threshold that could delay the first Fed rate hike.
Doves will point to the lack of clear hints about a September rate hike and the Fed’s data-dependence to hold on to their view that a December hike is most likely. The Fed continues to see business investment and exports as soft, and inflation remains well below the Fed’s 2.0% target.
Given the lack of hints, or clarity, about what happens at the next FOMC meeting, expect analysts — hawks and doves — to read into the statement what they want to see. The S&P 500 held on to half a percentage point gains following the statement release. The 10-year Treasury bond yield is up 3.0 basis points to 2.28, while the U.S. dollar is stronger against most major currencies.