When in doubt about the Fed's policies, or their implementation, always go right to the source of Fed ideas, Goldman Sachs, which moments ago published its post-mortem on today's FOMC statement, noting that the "post-meeting statement included modest upgrades to its description of growth but acknowledged the moderation in job growth and the decline in inflation, and it continued to describe risks to the outlook as “roughly balanced.”
The statement noted that the Committee expects to begin the process of balance sheet normalization this year, and an updated set of normalization principles clarified the series of caps. Taken together, Goldman continues to expect the announcement of balance sheet normalization in September and a return to rate hikes in December.
Main points from the report:
- The FOMC raised the funds rate target range to 1-1.25%, as widely expected. The median dot in the Summary of Economic Projections continued to show three hikes in both 2017 and 2018. The post-meeting statement included modest upgrades to its description of growth, continued to note the decline in the unemployment rate, but acknowledged the moderation in job growth and the decline in inflation. However, the statement continued to note that core inflation is running only “somewhat” below 2%, a more hawkish reference than we had expected. The statement continued to describe risks to the outlook as “roughly balanced.” Minneapolis Fed President Neel Kashkari dissented against the hike, in line with our expectations.
- The statement noted that the committee expects to begin the process of balance sheet normalization “this year.” The addenda to the statement provided additional guidance on the potential size of the “caps” for treasuries and mortgage backed securities, which could rise from initial levels of $6bn and $4bn, respectively, to peak caps of $30bn and $20bn. We think the language adopted – which dropped the condition “until the normalization of the level of the federal funds rate is well under way” included in the May minutes and the inclusion of specific dollar figures – make the start of balance sheet runoff in September more likely.
- The changes to the Summary of Economic Projections were a touch more hawkish than our expectations following the soft May CPI report. GDP growth in 2017 was upgraded a tenth to 2.2%, and the path for the unemployment rate was lowered significantly to 4.3% this year and 4.2% in 2018-2019, and NAIRU came down a tenth to 4.6%. Core PCE inflation for this year was lowered to 1.7% but was unchanged at 2.0% for next year. The funds rate projections were relatively stable, but the median and mode for 2019 declined by 0.1pp and 0.2pp respectively. Taken together, we continue to expect the announcement of balance sheet normalization in September and a return to rate hikes in December.