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Instant Analysis on FOMC statement: What do the dots say?

Scott Anderson
Chief Economist

The FOMC Statement for July was barely altered from the April meeting, and the taper remains on track for a November end to QE asset purchases. The Committee decided to move ahead with another $10 billion reduction in monthly asset purchases to $35 billion per month starting in July. This is down from $85 billion a month in purchases before the tapering began in January.

Front view of the Federal Reserve building in Washington, DCThe reductions in asset purchases were again evenly split between MBS and long-term Treasury bonds. In July the Fed will be buying $20 billion a month in Treasury securities and $15 billion a month in MBS and agency debt.

There was no mention of the plunge in Q1 GDP in this statement, only an upgrade to current economic conditions that economic activity has “rebounded” rather than “picked up.” There was further mention of the unemployment rate being “lower,” but still elevated. Household spending is rising moderately, and business fixed investment resumed its advance. These changes alone could be construed as a modestly more optimistic spin on current economic conditions. During Chair Yellen’s press conference, she mentioned that the Committee saw the decline in Q1 GDP as primarily stemming from “Transitory Factors,” and that growth has “Rebounded.”

The real action was in the new economic and interest rate projections released along with the FOMC statement, particularly the Fed funds rate “dot” plot. There was a downward adjustment to the GDP growth forecast for 2014, but this was more than offset by the unemployment rate that was expected to fall somewhat faster than forecast back in March, with a slightly higher PCE inflation path this year. This suggests a quicker achievement of the FOMC objective of a fully employed economy with stabilized inflation.

The central tendency on real GDP growth for 2014 moved down to 2.1 to 2.3 percent from a March forecast of 2.8 to 3.0 percent. This was a large downward growth revision from the FOMC in just one short quarter, but was due primarily to the dismal first quarter reading on real GDP and was not unexpected by the markets. The Fed’s GDP forecast for the balance of the year and for 2015 and 2016 appears to be generally unaltered.

The central tendency PCE inflation forecast for 2014 widen to the upside to 1.5 to 1.7 percent this year, from a March forecast of (1.5 to 1.6 percent). The outlook for PCE inflation for 2015 and 2016 remained unchanged.

The central tendency on the unemployment rate fell to 6.0 to 6.1 percent for 2014 from 6.1 to 6.3 percent forecast back in March, and by 2015 the Fed sees the unemployment rate between 5.4 to 5.7 percent from 5.6 to 5.9 percent forecast a quarter ago.

In short, the improving outlook on the economy is somewhat more supportive of a quicker normalization of short-term interest rates than the Fed outlined back in March. The Fed’s “dot plot” of FOMC and Fed President expectations of the Fed funds rate path was more aggressive on 2015 and 2016 rate hikes than in March.

Median expectation of the Fed funds rate at the end of 2015 was at 1.125 percent from 1.0 percent projected in March. By the end of 2016, the median expectation of the Fed funds rate was at 2.5 percent up from 2.25 percent in March. This is a far more aggressive path of rate hikes than the Fed Funds futures market has been pricing in recent months. Tempering this more hawkish stance of future monetary policy, the Fed cut their estimate of the “long-term” or neutral Fed fund rate target to 3.75 percent from 4.0 percent back in March. Some of these forecast changes are likely due to the change in the makeup of the Committee, but it also reflects the Fed’s faster progress towards reaching its dual mandate of full employment and stable inflation.

There was little post-statement reaction from the markets. Treasury yields generally moved down today across most maturities. The S&P 500 moved higher again, up about a half a percent today.

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