Late July FOMC (Federal Open Market Committee) meetings have a Rodney Dangerfield problem: They get no respect.
Sandwiched after a June press conference/dot plot FOMC meeting, which is followed in mid-July by the Federal Reserve Chair’s annual testimony to Congress, but before the August Jackson Hole Conference and then a press conference/dot plot September FOMC meeting, the July meeting gives the Fed little opportunity to surprise – and true to form, today’s FOMC statement startled no one.
Balance sheet run-off
That said, the most noteworthy change from the previous statement (on 14 June) came in the final paragraph: The FOMC states that while it is maintaining its current reinvestment policy “for the time being,” the Committee expects to begin implementing its balance sheet normalization program – which was rolled out at the June meeting and discussed here – “relatively soon.” This is Fedspeak for “We expect to announce in September that balance sheet normalization will commence this fall” – with the usual caveat that the decision will depend on the economy evolving broadly as anticipated.
This “see you in September” signal was widely expected. Chair Janet Yellen herself at the June press conference and in the Q&A following her July testimony used the “relatively soon” language, but it now replaces the previous FOMC statement’s phrase that the balance sheet program is expected to commence “this year.” And for what it is worth, in November 2016, Chair Yellen said that a policy rate hike would be “appropriate relatively soon” just weeks before the December 2016 meeting when the Fed in fact did hike rates.
Subtle shift in inflation language
The other noteworthy change in today’s statement is that the Fed, referring to the recent data on U.S. inflation, omitted the adverb “somewhat” when it acknowledged that core inflation is running below 2%. However, the Committee left unchanged its assessment that inflation is expected “to stabilize around the Committee’s 2% objective over the medium term,” but that it “is monitoring inflation developments closely.”
Nothing in this statement changes PIMCO’s view that a third rate hike this year – as suggested by the latest FOMC dot plot – is far from a done deal. Look for the Fed to begin to put the balance sheet drawdown on autopilot this fall, but the next rate hike will truly be (inflation) data-dependent. If there is no rebound in core inflation between now and December, the next rate hike may be a decision for the next Fed Chair, if Janet Yellen is not reappointed.
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Richard Clarida is PIMCO’s global strategic advisor and a frequent contributor to the PIMCO Blog.