As anticipated, the did not only leave its policy stance unchanged but also refrained from making any policy-relevant adjustments to its post-meeting statement. The main changes occurred in the first paragraph, which describes the assessment of the economic situation, and were largely offsetting (e.g. “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up” or “although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened.”). The attempt to balance the positives and negatives continued during Chair Yellen’s press conference, when she stated that one cannot take the stability of long-run expectations for granted, only to add that there are indications that ware growth has picked up. The statement also highlighted the Committee’s expectation that “labor market indicators will strengthen” again.
This outlook is echoed in the updated Summary of Economic Projections. While FOMC members have slightly lowered their growth forecasts, they still see the economy expanding by 2.0% in 2016 as well as in the next two years, while the unemployment rate is expected to ease to 4.6%, a tad below the 4.8% NAIRU estimate. Following the uptick in dynamics over the past several months, FOMC members have lifted their projections for the core PCE deflator for 2016 and 2017 by 0.1pp each. Against this backdrop, it is interesting and noteworthy (though not surprising, as we expected lower dots) that the FOMC members’ interest rate projections came down once more. The new Fed forecast shows two hikes in the remainder of this year, followed by three moves in 2017 and another three in 2018.
With today’s statement and updated projections, the Fed left all options on the table, including a rate hike in July. We thus stick to our call for two more moves in 2016 – even as we acknowledge that there is now a sizeable minority within the Committee favoring only one hike for this year.
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