Fed Statement: Let the dots – and the dissents – do the talking

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Going into yesterday’s Federal Open Market Committee (FOMC) meeting, the question was in what way – or ways – the statement and the accompanying Summary of Economic Projections (SEP) would signal the committee’s conviction that it expects to hike rates later this year.

In July, the Fed statement acknowledged that “near-term risks to the economic outlook have diminished”‎ but omitted – as had all previous statements this year – any language on the balance of risks. In today’s statement, the Fed returns the balance of risk language, telling us that the FOMC feels that risks “appear roughly balanced.” The committee chose not to offer further calendar guidance, instead borrowing a quote from Chair Janet Yellen’s Jackson Hole speech on 26 August that “the case for an increase in the federal funds rate has strengthened.”

Much more informative about the FOMC intentions were the three dissents – by Loretta Mester, Esther George and Eric Rosengren – in favor of a rate hike at this meeting and the fact that 14 of the 17 dots in the SEP now indicate that at least one hike will be appropriate by the end of this year. Interestingly, the dot plot for 2017 now shows a median of only two hikes in 2017 compared with three hikes projected in the previous dot plot in June. And the median longer-run dot has shifted down slightly to 2.875%.

So with the obligatory “data dependency‎” caveat, this is a committee that expects to hike later this year, which would mean at the December meeting.

Yet, while the dissents and dots indicated a somewhat more hawkish tilt in the September FOMC compared with June, the dots in later years offer a more dovish tilt in terms of pace and destination. Both the statement and SEP reaffirm that this will be a very gradual liftoff. Indeed, the longer-run median dot at 2.875% resides firmly in the New Neutral framework.

By Richard Clarida, PIMCO’s global strategic advisor

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