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.


This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.
The PCE price index (the Personal Consumption Expenditures index) is a United States-wide indicator of the average increase in prices for all domestic personal consumption. The less volatile measure of the PCE price index is the core PCE (CPCE) price index which excludes the more volatile and seasonal food and energy prices.