There was no change to the US Federal Reserve’s highly accommodative policy stance this morning. That means a continuation of asset purchases of $85 billion per month and forward guidance that anticipates no change in their zero interest rate policy for a considerable period of time.
Compared to June there were a few tweaks to
the July Statement. The Committee
acknowledges that mortgage rates have moved higher recently in the context of
an overall strengthening housing market.
That acknowledges the importance of the improving housing market on
expectations of higher growth and improving financial conditions in the period
ahead. Our assessment is the rise in
interest rates to-date is unlikely to derail the improving trajectory in the
The comment “the Committee recognizes that
inflation persistently below its 2 percent objective could pose risks to economic
performance…” lent a dovish tone to the Statement. I think that’s a nod to the challenge for the
Committee in assisting the understanding that asset purchase tapering is not a
tightening in monetary policy and that conditions will remain highly
accommodative for some time yet. We
continue to expect that when the Committee does announce it is ready to start
reducing its asset purchases it will be accompanied with a tweak to its forward
guidance to reinforce that point. Most
likely candidate for that is a reduction in the “target” 6.5% unemployment rate
to perhaps 6.0%.
The FOMC decision came hot on the heels of
the release of June quarter GDP data which showed higher than expected growth
in the quarter. Growth came in at a
seasonally adjusted annual rate of 1.7%, higher than the markets expectation of
1.0% and our forecast of 1.2%. In
fact it came in higher than forecasts of
a couple of weeks ago before most analysts revised their forecasts down,
largely on the back of weaker-than-expected trade data and larger negative
contribution from net exports. Indeed
net exports detracted 0.8% from growth in the quarter.
On the other side of the ledger, consumer
spending, residential construction and business investment were all stronger
than expected. The biggest surprise
however was that while Government spending contracted over the quarter, it was
by a far smaller amount that would be expected given recent spending cuts. This raises the risk that declines in
Government spending will continue to be a drag on growth for longer.
The positive news of better-than-expected
June quarter was offset by downward revisions to the four prior quarters. March quarter growth from 1.8% to 1.1% which
obviously changes my story about the June quarter being the weak quarter for
2013 growth. Given our expectation of stronger growth in the second half of the
year, that dubious honour now belongs to the March quarter.
This GDP release also incorporated
benchmark revisions, methodological and statistical changes. The most significant of these was the
inclusion of intellectual property production (e.g.) R&D into the business
investment series. While those revisions
have lifted the level of GDP, the pattern of growth remains largely unaltered.
We expect growth in the second half of the year
will benefit from the waning of fiscal drag, the continuing recovery in the
housing market and stronger jobs which will all support stronger consumer
spending. Friday’s payrolls data is the
next important piece of news. We expect
another solid month of jobs growth which should result a tick down in the
unemployment rate, but as always, keep an eye on the participation rate.
Today’s FOMC statement, recent data and
expectation of future data all support Fed tapering in the not too distant future. However, I remain equally convinced they will
not move down that path prematurely. The
release of the minutes of the FOMC meeting in a couple of weeks will no doubt shed