Concerns about recent global economic and financial conditions trumped further improvement in the labour market to see the FOMC take the cautious path and leave US interest rates unchanged today. In the Press Conference Chair Janet Yellen signaled, unsurprisingly, that China and emerging markets are center to those concerns.
In July it seems the only thing that mattered to the Fed was the domestic labour market. The key sentence in today’s statement was more global - “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near-term.” The good news in that is the Committee is aware of its actions having global implication and that they are not going to do anything to derail the global economy.
Aside from that there were only minor tweaks to the Statement. The Committee acknowledged the further decline in the unemployment rate, solid jobs gains, improvement in the housing market, modest gains in household spending and business investment, but also that inflation continues to run below the Committee’s longer-run objective. In the Press conference Yellen continued to point to the recent downward pressure on inflation being largely due to factors that will ultimately prove to be transitory (the strong USD and commodity prices).
Changes to the Summary of Economic Projections lowered the median forecast for the Fed funds rate by around 25bp right across the projection period. The median longer-run forecast was also lowered to 3.5% from 3.75% which is getting incrementally closer to our own estimate of 3.0%. Changes in the median projections for growth, the unemployment rate and core inflation were all tweaked with no real surprises.
So where to from here? The Committee continues to see inflation rising towards 2% over the medium term so a rate increase is coming - it’s still just simply a question of when. A rate rise this year is still favoured by the majority of FOMC participants, although one committee member favoured a rate cut into negative territory. Yellen offered a wry smile when questioned about that in the Press Conference stating the Committee didn’t spend much time debating that option.
October and December are still live for lift-off. Seems the only question now is when global uncertainty will be resolved…