The state of play at the June meeting
At the June meeting, the Federal Open Market Committee voted unanimously to hold rates at the current level of 3.5 to 3.75 per cent. All members, with the exception of new Fed chair Kevin Warsh, submitted new economic and interest-rate forecasts for the quarterly Summary of Economic Projections.
The SEP showed that the median committee member had turned more hawkish since March. Headline and core inflation forecasts were revised up and the FOMC as a whole was split roughly 50:50 between those thinking a rate rise this year was needed and those wanting to hold rates. The split of voting members is not known, but reasonable assumptions suggest it might be a touch more dovish.
Warsh was tight-lipped in his press conference but showed concern about inflation and insisted the Fed would bring it down. He described the FOMC’s commitment to the 2 per cent target as “strong, unanimous and unambiguous”.
What we’ve learnt since
The data since the meeting has reinforced the view that inflation is now a more serious threat to the achievement of the Fed’s dual mandate than the labour market.
While June’s CPI inflation data came in slightly below expectations, much of the deceleration was driven by falling energy prices in the wake of the US-Iran deal. With the ceasefire collapsing a few weeks ago, July’s data is set to be less encouraging and the central bank can expect higher energy prices for longer.
Labour market data for June was sufficiently robust. While payroll jobs growth was lower than expected, the unemployment rate also ticked down.
Warsh has held fast to his refusal to give forward guidance in public appearances following the June meeting. But several Fed speakers, including Fed governor Lisa Cook and New York Fed president John Williams, have in recent weeks indicated that they do not think a policy adjustment is warranted yet.
There have been a few hawkish statements from other members, but most have been conditional.
Governor Christopher Waller said in early July that “if we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term”. But the CPI figure ended up being lower than expectations, removing some of the bite from his remarks.
Lorie Logan, the Dallas Fed president, said last week that she believed “modestly higher interest rates would better balance the outlook and risks”, but added that over the course of the discussion at the meeting “I may persuade them, they may persuade me [ . . . ] we’ll all adjust our thinking as we take in new perspectives.”
Our predictions for this meeting
With high confidence, we expect the Fed to hold the fed funds rate at the current level of 3.5 to 3.75 per cent at this meeting.
While pressure is clearly building on the FOMC to tighten policy soon, the downside surprise in June’s inflation data buys the Fed some time. One or two dissents are likely, but a large majority have been signalling that patience is warranted.
Warsh will most likely avoid giving a sense of what he would need to see to trigger rate increases later this year. But with inflation still well above the 2 per cent target and set for a resurgence over summer as energy prices rise again, the question is likely to come up. For the new Fed chair, saying nothing is set to get harder over the coming weeks.