FOMC Sticks to Rate Path Despite Recent Data; Moves Forward with Balance Sheet Plans
by Craig Dismuke, Dudley Carter
The FOMC voted at their June meeting to hike their overnight target range another 0.25% to a range of 1.00-1.25%, the third hike in seven months. Overall, the Statement was more hawkish than expected. The Statement highlighted a labor market that has “continued to strengthen,” economic activity that has been “rising moderately” (a slight upgrade from May’s language saying economic activity had “slowed”), job gains that have been “solid,” household spending that “has picked up,” and business fixed investment which “has continued to expand.” As it relates to inflation turning lower, the Statement acknowledged the recent weakness but continues to expect it to “stabilize around the Committee’s 2 percent objective over the medium term.”
The only note of caution, despite the recent run of weak data, was the comment that they are “monitoring inflation developments closely.”
Minneapolis Fed Bank President Neel Kashkari dissented to the vote, preferring to not raise rates at this time.
In a supplemental addendum to the Statement, the Fed laid out its balance sheet plans in more detail. The Statement notes that they plan to begin letting the cashflows of the portfolio roll-off later this year. They will begin with a $10 billion per month cap on the amount allowed to roll-off including a $6 billion cap on Treasury roll-off and a $4 billion cap on MBS and agency roll-off. The cap will increase by $10 billion every 3 months until it reaches a final cap of $50 billion per month, which would include a $30 billion cap on Treasury roll-off and a $20 billion cap on MBS and agency roll-off. These caps are slightly larger than what seemed to be the market consensus. Moreover, that the Fed announced the details of the roll-off plan this early was a bit more aggressive than many expected.
In the Summary of Economic Projections, FOMC participants left their growth expectations and target rate projections largely unchanged. Participants still expect to hike one more time this year, three times in 2018, and three additional times in 2019.
FOMC Official Statement
June 13-14, 2017 Meeting
Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running 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 continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 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. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans.
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; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
Implementation Note issued June 14, 2017