Instant Analysis: FOMC statement for July
The Federal Open Market Committee (FOMC) held interest rates steady at their July meeting as expected, maintaining the target range between 0.25 and 0.50 percent. However, based on the language in the statement today, the group’s patience isn’t going to be unlimited.
The July statement comes in a bit on the hawkish side of market expectations. There was an upgrade of the assessment of current economic conditions, and the statement adds a sentence: “Near-term risks to the economic outlook have diminished.” Moreover, Esther L. George went back to her dissent, preferring to raise the target range for the fed funds rate to 0.50 to 0.75 percent.
The statement points out that the labor market has strengthened since the last FOMC meeting, and that household spending has been growing strongly. On the negative side, business fixed investment has been soft, while inflation and market-based measures of inflation expectations continue to run below the Fed’s long-run objective.Bottom line: The statement today puts a September rate hike from the FOMC back on the table, but the threshold for a rate hike in September remains high in my opinion. The FOMC would need to see further upside surprises on U.S. jobs and economic growth, an improved global outlook, and more signs that inflation expectations are starting to normalize from currently low levels. There may be more evidence of this by the September FOMC meeting, but the evidence might not be definitive for a majority of FOMC members.
We maintain our view of the next FOMC rate hike occurring at the December meeting. Fed Funds futures are begrudgingly coming around to that view as well. The probability of the next Fed rate coming at the December meeting according to the market has just broken the 50% threshold at 51.7%.
Reaction in the markets to the FOMC statement has been muted. The S&P 500 is currently trading close to flat on the day, and the 10-Year Treasury yield is about 4 basis points below yesterday’s levels at 1.52 percent.