FOMC: What we got from the July statement – Deutsche Bank

Analysts at Deutsche Bank explain that the FOMC statement was very close to their expectations and the one minor surprise was a more explicit firming in the Committee’s guidance about the timing of an announcement to start its balance sheet unwind, which they now expect to begin “relatively soon.”

Key Quotes

“The Committee stopped short of explicitly saying that they would make an announcement in September. But this change, along with the inclusion of the statement that they are maintaining their reinvestment policy “For the time being”, come about as close to indicating a September announcement as they could.”

“The other focal point of the statement was how the Committee described the inflation outlook. As we expected, they acknowledged the further decline in (PCE) inflation since the June meeting, and now view inflation as running “below” rather than “somewhat below” their inflation target. Overall, the updates to the inflation description in the opening paragraph were necessary “house cleaning” in light of recent developments. Importantly, the Committee made no change to their medium term guidance on inflation, which is still expected “to stabilize around the Committee’s 2 percent objective over the medium term.”

“There were only minimal changes to the statement beyond these points. On the economy, the Committee upgraded their view on job gains following the strong June employment report and modified their language on household spending, which they now describe as continuing to expand. Committee members were unanimous in their agreement with this statement, unlike the June statement and rate hike where President Kashkari dissented.”

“Our near-term policy expectations are unchanged following this meeting: The next policy change should come in September when the Fed announces that it will begin in October a gradual tapering of its balance sheet reinvestment purchases. We see the next rate hike coming in December, assuming that shorter horizon measures of inflation (e.g., 3-month annualized changes) strengthen and economic developments are broadly in line with our, and the Fed’s, expectations.”