It’s hard to believe that it’s been fully six weeks since the Fed’s last meeting, where the median central banker just barely maintained a preference for two rate hikes this year. In the accompanying Summary of Economic Projections (SEP), the central bank negatively revised its expectations for economic growth and unemployment, while leaving the inflation forecast essentially unchanged.
Over the last month and a half, the US economy has given off a series of mixed signals. We’ve seen solid growth in the labor market, with the NFP report showing that the US economy created another 280k jobs in June and initial jobless claims recently dipping to a 40 year low, but the Fed has essentially shifted its focus from jobs to inflation in recent months. On the inflation front, the CPI reports have been on the weak side, with core prices rising 0.1% and 0.2% month-over-month in June and July respectively, while Core PCE rose 0.1% m/m in May and the BLS’s measure of Average Hourly Earnings was flat in June. The consumer has been similarly mixed, with personal spending edging higher, consumer confidence spiking toward 100, then falling back to 90.9, and retail sales missing expectations.
After putting all of these economic reports in a blender and setting it to puree, the central bank is unlikely to be any more optimistic on the economy than it was in June. While Fed Chair Janet Yellen took pains to emphasize that every meeting is “live” (meaning that the Fed could raise interest rates), it will almost certainly refrain from making any functional changes to monetary policy tomorrow. Indeed, even any substantive changes to the statement (note there will be no press conference or Summary of Economic Projections released this month) are unlikely.
Instead, the central bank will likely emphasize that it remains “data-dependent” and that the committee would like to see further signs of improvement in price pressures before acting. In our view, the statement will still leave the door cracked open for a potential rate hike in September, which the market is now pricing as just a 19% chance, so a relief rally in the dollar is possible. One key wildcard for dollar bulls to pin their hopes on will be the monetary policy votes, with optimists crossing their fingers that Jeffery Lacker or another hawkish-leaning member of the Fed will cast a dissenting vote in favor of raising interest rates immediately.
Barring such a surprise, the market impact of tomorrow’s meeting will likely be more subdued than usual, with forward-looking traders already looking past the FOMC to Thursday’s Q2 Advance GDP reading. In other words, we expect that the FOMC will serve up a mere appetizer this week and save the main course for September’s meeting.