FOMC monetary policy July 2016: Assessing future bias

Yesterday, FOMC policymakers preferred to keep policy steady and not go for a hike. This was somewhat expected given the risks arising from the British referendum. There are not enough evidence yet to make a decision.

Let’s first assess the bias in monetary policy statement –

• Improvement in the labor market strengthened, while economic activity expanding at moderate pace. (Mild Hawkish bias)
• Growth in household spending strong, but business fixed investments soft. (Neutral bias)
• Inflation below committee’s 2 percent long-run objective. Market-based measure low but survey based long term measure little changed. (Neutral bias)
• FOMC expects inflation to remain low in the near-term but will reach 2 percent objective over the medium term as economic activity improves and labor market strengthens. (Neutral bias)
• FED is closely monitoring the global economic and financial activity as well as inflation closely to decide on its next move. (Neutral bias)
• The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. (Neutral bias)

Kansas City Fed president Esther George returned to her call for rate hikes. Hence FOMC is once again divided.

Compared to the previous statement, where there were 5 neutral bias statements and one hawkish statement, in this policy declaration we see no major changes as expected. Only instead of a hawkish bias, we have a mild hawkish one with a dissenter compared to unanimous June.

Since the Fed kept the doors open for hikes in 2016, speculations are likely to rise and fall in line with economic data.