The Federal Reserve hiked rates as expected at its meeting on 13–14 June 2017, and it made news by providing important details about its plans to normalize its balance sheet. However, one crucial detail the Fed did not provide: when it will commence that process of balance sheet normalization.
The minutes of the June Fed meeting confirm that, while the Federal Open Market Committee (FOMC) is in broad agreement that the process should start later this year, there is a range of opinions with regard to precisely when. For example, the minutes tell us that “several preferred to announce a start to the process within a couple of months,” while “some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation.”
Fed policy rate trajectory
The committee also remains divided on the appropriate pace for raising the federal funds rate, with some participants concerned that the path implied by the “median blue dot” would remove accommodation too rapidly to be consistent with achieving the Fed’s inflation target of 2%. Right now, Fed policymakers believe (hope?) that the recent shortfall in U.S. inflation is due to temporary factors and that with unemployment projected to continue to fall below the NAIRU (non-accelerating inflation rate of unemployment), inflation in the coming years will rise to the 2% target.
June’s Fed meeting also had a great deal of discussion about financial conditions, and what the easing of said conditions going into the meeting indicated. Remember, however, that the meeting took place before the recent sell-off in global sovereign bond markets triggered by potential monetary policy pivots at the European Central Bank, the Bank of England and the Bank of Canada. Look for these policy pivots to be a topic of much discussion at the July FOMC meeting.
Visit PIMCO’s Rise Above Rates page for our most up-to-date outlook for interest rates and insight into how we expect financial markets to be affected.
Richard Clarida is PIMCO’s global strategic advisor and a frequent contributor to the PIMCO Blog.