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Thursday, July 27, 2017

Fed Watch: FOMC Snoozefest

Tim Duy:

The Federal Reserve completed its July meeting with statement that pretty much everyone anticipated in advance. Interest rates were left unchanged and the Fed opened the door to begin balance sheet reduction "relatively soon." That means September. There was no reason to believe that the Fed does not still expect a third rate hike for this year which, if it comes, will be in December. That hike is of course data dependent.
A couple of quick notes. Regarding balance sheet reduction, I think this via Bloomberg is correct:
“September is the most likely outcome” for the launch of the balance-sheet drawdown, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “But I can’t rule out the idea that they would wait until November if the debt ceiling really looks messy.”
Clearly, the Fed will stand pat if certain policymakers in Congress and the White House (you know who you are) insist on sending the US economy down the path of debt default (I can't believe I even have to consider such insanity).
On inflation, some I think interpreted this as dovish:
On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
First, this is simply a factual statement, an acknowledgement of what everyone and their brother already knows. Second, what is important is the forecast, and that remains unchanged:
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.
And third, pay attention to the "12-month" language that first appeared in the May statement. Pay close attention. They Fed is telling us to stop paying attention to all those year-over-year inflation charts we like to make. They have accepted that level effects from inflation shortfalls in the first half of this year will live in the year-over-year numbers until next year. Pay attention to the path of the month-over-month numbers (blue bars):

Corecpi717

If those numbers climb back up toward 2 percent this year, the Fed will feel vindicated even if the year-over-year numbers remain below target. Not just vindicated, but also inclined to raise rates as expected.
Bottom Line: Fed remains on its existing policy path.

    Posted by on Thursday, July 27, 2017 at 08:26 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (19)


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