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September 2016 Federal Reserve Rate Hike

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September FOMC Meeting

[full blog here: https://deeplearning666.wordpress.com/2016/09/18/september-fomc-meeting/]

A recap.

In the lead-up to this month’s FOMC meeting, we take a step back and look at the meeting minutes of July. Comparing the conclusions made in the previous meeting with this month’s data allows us to understand the likelihood of particular outcomes.

The FOMC reiterated their dependence on both incoming data and the projection of economic conditions. This included the assessment of realised and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. Including measures of labour market conditions, indicators of inflation pressures and international developments. These continue to drive the decision making process. The Committee expected that economic conditions would warrant only gradual increase in the Fed funds rate and it was likely to remain below levels that are expected to prevail in the longer run.

Particular areas of importance in the July meeting where:

Is there a persistent moderation in employment?

“A couple of members indicated that, in light of their judgment that labor market conditions were at or close to the Committee’s objectives, some moderation in employment gains was to be expected. In contrast, several other members expressed concerns about the likelihood of a further reduction in the pace of job gains, and it was noted that if that slowing turned out to be persistent, the case for increasing the target range for the federal funds rate in the near term would be less compelling.”

The unemployment rate has remained at 4.9% for the third consecutive month after increasing from May's low of 4.7% as Non-Farm Payrolls continue at a 3 month moving average of 231,000 consistent with the strong levels of 2015 and early 2016. Average hourly earnings missed forecasts (0.1% vs 0.2% forecasted) as the U-6 unemployment rate remained at 9.7.

Uncertainty following Brexit –

“While members judged that near-term risks to the domestic outlook had diminished, some [participants] noted the U.K. vote, along with other developments abroad, still imparted significant uncertainty to the medium to longer-term outlook or foreign economies, with possible consequences for the U.S. outlook. As a result, members agreed to indicate that they would continue to closely monitor global economic and financial developments.”

Global financial market volatility increased post the shock Brexit results, US markets declining but quickly regaining losses over the subsequent days. Uncertainty over the implications of Brexit seemed to be short-lived. Although the long-term implications are not yet fully understood, business sentiment has continued to shrug off Brexit fears in the US.

Inflation Expectations –

“Members continued to expect inflation to remain low in the near term, in part because of earlier declines in energy prices, but most anticipated that inflation would rise to 2 percent over the medium term as the transitory effects of past decline in energy prices dissipated and the labor market strengthened further. Nonetheless, in light of the current shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor actual and expected progress toward the Committee’s inflation goal.”

Inflation, measured by the change in cost of living (CPI - 0.8% YOY unadjusted) remains relatively benign and at a shortfall to the FOMC's long-term inflation goal.

July Outcome –

“After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, members decided to maintain the target range for the federal funds rate at ¼ to ½ percent at this meeting. Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred to raise the target range for the federal funds rate at the current meeting, citing the easing of financial conditions since the U.K. referendum, the return to trend economic growth, solid job growth, and inflation moving toward two percent.”



July FOMC press release:

Committee Policy Action

“Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target rate for the federal funds rate at ¼ to ½ percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and reading on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation foal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holding of longer term securities at sizable levels, should help maintain accommodative financial conditions.” [FOMC Meeting Minutes July 26-27].
 

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