The FOMC confirmed the higher target range for federal funds of 1.0% to 1.25% anticipated by markets at today’s meeting. The Fed also provided specific parameters for balance sheet reduction, but stopped short of announcing a launch date or a cumulative end point for the unwinding of quantitative easing.
Following is a summary of the FOMC’s statement:
- The pace of economic activity returned to “rising moderately” from the slower pace noted at the May meeting.
- Job gains have slowed. The Fed looked past slower job growth in May, but highlighted it in today’s release.
- The Fed noted a pickup in household spending.
- The recent decline in inflation was noted and stands in contrast to the assessment in early May.
- The Fed now expects inflation to remain below target through the end of 2017 and is “monitoring developments closely”.
- The Fed Funds target range is higher by 0.25%
- Principal payments on mortgage-backed and Treasury securities will be reinvested for now, but the Fed expects to implement its balance sheet normalization plan this year.
- There was one dovish dissent from Neel Kashkari, who preferred a stable rate target.
- Quarterly economic projections hint at a lower expected non-inflationary unemployment rate. In other words, it looks like the Fed would be less aggressive tightening in response to lower unemployment than previously suggested.
- The “dot plot” was little changed. By maintaining a stable outlook however, the Fed’s projections look further out of line against lower market expectations since the last meeting.
Post-meeting market reactions have been slightly negative. The 10 year Treasury yield had been lower on the day by roughly 10 basis points. Post release, markets gave back half of that move. Leading up to the meeting, some market participants expected balance sheet reductions to be pushed into early next year. The amount of detail and earlier timing may be behind the modest change in market sentiment.
Gary Pzegeo joined CIBC Atlantic Trust Private Wealth Management in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.