Content provided by Marc Pfeffer, CLS Senior Portfolio Manager
Round one of Federal Open Market Committee (FOMC) communication delivered mixed messages to markets, as expected. The FOMC statement was upgraded to acknowledge better data, while movements in the “dots” (assessments of appropriate monetary policy) implied a slightly more accommodative fed funds rate path. The communication released thus far supports the view that September remains the most likely single month for rate liftoff.
Policy Statements Moves Positive
The Fed’s language changes were mostly positive, as was expected, and limited to the first paragraph of the statement describing current economic conditions. The growth and labor market descriptions were upgraded, and economic activity was described as “expanding moderately after having changed little during the first quarter.” The pace of job gains also “picked up,” while the unemployment rate “remained steady.”
On balance, the FOMC saw further reductions in slack: “a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.” Assessments of consumer spending and housing were more positive than before, but business fixed investment and net exports were still described as “soft.”
On the inflation front, the only new language was a mention that “energy prices appear to have stabilized.” FOMC still saw risks to the outlook for the labor market and growth as “nearly balanced.”
Summary of Economic Projections (SEP)
In its advance version of its Summary of Economic Projections (ahead of the full release of Fed minutes expected in July), the expectations of Fed officials were indicated by a “dot plot” (a dot shows where a Fed official expects the fed funds rate to be at the end of the calendar year). The dot plot showed the median forecast stayed the same for 2015, but the rate was revised lower for 2016.
- Estimates of the fed funds rate moved south by southeast, and the medians fell a bit in 2016 and 2017. The end-2015 “dot” held steady at 0.625%, the end-2016 “dot” fell by 25 basis points to 1.625%, and the end-2017 “dot” fell by 25 basis points to 2.875%. The median long-run estimate was unchanged.
- June’s dot plot suggests five FOMC participants think it will be appropriate to raise rates twice before the end of the year, down from seven in March. Five participants see only one rate hike before the end of the year as appropriate, up from one in March.
- Growth projections for 2015 were lowered to 1.8-2.0% in June from 2.3-2.7% in March, while the lower bound of estimates within the FOMC’s central tendency were revised up a tenth for both 2016 (now 2.4 to 2.7%) and 2017 (now 2.1 to 2.5%).
- Unemployment rate projections over the next three years were little changed with a small increase in the unemployment rate for this year to 5.2-5.3% from 5.0-5.2% previously. Longer-run estimates for the unemployment rate were unchanged at 5.0-5.2%.
- Inflation expectations were largely unchanged with a small increase to the lower bound for core PCE inflation expectations in both 2016 and 2017 – now 1.6-1.9% and 1.9-2.0%, respectively.
Click here to view the full advanced release of the Fed’s Summary of Economic Projections.