Fed Rationalizes Recent Weakness, Keeps June Hike Alive
by Craig Dismuke, Dudley Carter
As expected, the FOMC voted unanimously to leave its target rate range unchanged at 0.75%-1.00%.
In its assessment of economic activity, the FOMC’s Official Statement noted that growth had slowed leading up to the meeting. However, the Statement also noted “the slowing in growth during the first quarter as likely to be transitory”. Specifically, the Statement noted continued strengthening in the labor market, positive fundamentals underpinning household spending despite the weak rate of 1Q consumption, firmer business fixed investment, and inflation “running close to the Committee’s 2 percent longer-run objective.”
As it relates to monetary policy, the Committee’s acknowledgement of the firming labor market and near-target inflation points to a continuation of the gradual pace of tightening. Specifically, the Statement noted that the Committee continues to expect “gradual adjustments in the stance of monetary policy”.
The FOMC results are largely as-expected. The markets were only giving a May hike a 13% chance prior to the meeting. However, markets largely expected the Committee to hike at its June 14 meeting, with futures contracts pricing in a 70% likelihood earlier this morning. The FOMC’s Official Statement remains consistent with a June hike presuming the weaker data proves transitory. Fed funds futures have repriced the probability for a June hike up to 94%.
FOMC Official Statement
May 3, 2017
Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Job gains were solid, on average, in recent months, and the unemployment rate declined. Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid. Business fixed investment firmed. Inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained 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 readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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 in 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 holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.