FOMC Policy Statement a Very Close Facsimile of the Prior One

July 29, 2015

Officials made even fewer modifications in the wording than the scant amount I was expecting, and the only changes came in the first paragraph describing economic conditions.  The labor market — both job growth and unemployment — were upgraded, but the overall assessment of moderately expanding activity, sub-target inflation, low market-based measures of inflation compensation, and stable longer-term inflation expectations was left unchanged.  Business investment and net exports stayed “soft.”

The second paragraph covering the economic outlook was not changed and notably kept the characterization of risks to prospects for growth and the labor market “as nearly balanced,” not “balanced” as some analysts were anticipating.  This leaves the timing of the first hike — September or a couple of months later — no less ambiguous than before.  Likewise, an unchanged third paragraph uses the same criteria needed for an initial rate hike very subjective, namely “some further improvement in the labor market” and reasonable confidence among committee members “that inflation will move back to its 2% objective over the medium term.” 

There’s been no change in the policy of principal reinvestments that will maintain the size of the Fed’s balance sheet.  The statement stresses that a balanced approach will be taken toward rate normalization, meaning a gradual path and one that would probably involve rate levels lower than their longer run normal points for a while even after employment and inflation are near mandate-consistent levels.

There were again no dissenters to the current statement.

The statement in short is less definitive about the certainty of a September rate hike than implied in public remarks since the June meeting by Chair-Person Yellen and several other members of the FOMC.  The statement avoids mentioning developments since the June meeting such as greater uncertainty surrounding Chinese demand, policy and risk to global financial instability, nor about the big drop in world commodity prices and several emerging market currencies, nor about the Greek crisis, which won’t be over until it’s really over.  No doubt such topics were discussed and may appear in the minutes.  For now, a statement that closes no policy options has been presented.

At 14:45 EDT, forty-five minutes after the statement’s release, the biggest reaction was a 0.8% decline in WTI crude oil.  Stocks are little changed, the dollar and gold are marginally stronger, and the 10-year Treasury yield has fallen two basis points to 2.27%.  All in all, it’s a muted initial reaction to a statement that keeps the Fed’s cards close to the vest.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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