Instant Analysis: FOMC statement for June

Posted By Scott Anderson In Economic Outlook | 1 Comment

The doves reigned supreme at the June FOMC meeting.  As expected, there was no change to the Fed funds target rate, which remains at a range of 0.25 to 0.50 percent.

Federal Reserve at dusk. [1]Contrary to last FOMC meeting, the decision to hold the target interest rate steady was unanimous among voting members. In April, Esther George dissented, preferring to raise the Fed funds rate at that time.

The FOMC statement acknowledged that improvement in the U.S. labor market had slowed, and the job gains had diminished.  This labor market slowing has clearly put the timing of the next FOMC rate hike in flux and the FOMC on hold until the clouds of economic uncertainty diminish.  While the FOMC has not given up completely on their dream of eventually normalizing short-term interest rates, the median FOMC rate hike expectation is still for two quarter-point moves this year; and they have scaled back their expectations on how far they can push things in 2017, 2018, and beyond.

Missing: mention of global downsides

Surprisingly, no mention of Brexit or global downside risks in their statement today, but it had to be in the back of many FOMC members’ minds.

The big news comes from the revision to the FOMC “Dot-Plot” projections on the expected path of the Fed funds target rate through 2018 and longer-term.   FOMC members scaled-back their interest rate hike expectations aggressively, especially for 2017 and 2018.

At the same time, the median long-run Fed funds target rate was reduced a quarter percentage point since the March meeting to just 3.0%. This is a big acknowledgement from the Fed that this abnormally low interest rate environment will last longer than anticipated six months ago, and the path toward normalization will remain glacial at best for the foreseeable future.   As we foreshadowed in last week’s U.S. Outlook report, lower interest rates for longer is the message from today’s FOMC meeting.

Looking ahead to rate hikes

The FOMC Dot-Plot median Fed funds target rate still implies two quarter-point rate hikes for 2016, though six FOMC members see just one rate hike (this is up from only one member who saw just one rate hike back in March).  The FOMC’s median Fed funds target rate for the end of 2017 and 2018 fell a quarter percentage point and a half percentage point, respectively, from the FOMC median back in March. The 2017 Fed funds rate median is now 1.625%, and just 2.375% for 2018.

Looking at the June statement, there was really little substantive change beyond the downgrade of current labor market conditions and change in Esther George’s vote.  If you are looking for a silver lining, the FOMC did note that economic activity appears to be strengthening in the second quarter, and household spending has improved.  And if  you are still looking to refinance your mortgage, or buy a house or car, rates are likely to remain very attractive by historical standards.


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