FOMC monetary policy September 2016: Assessing future bias

Yesterday, FOMC policymakers preferred to keep policy steady and not to go for a hike. This was somewhat expected given the division among policymakers with regard to inflation and the pace of economic growth.

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

• Improvement in the labor market strengthened, while economic activity picked up from its 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. Near-term risks balanced.(Neutral bias)
• FED is closely monitoring the global economic and financial activity, domestic and international developments 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)

The statement is almost same as last month’s, except for few minor tweaks. Hence what really is important to see in this meeting is the fact that FOMC board is quite divided. Three policymakers, Esther George of Kansas City Fed, Loretta Mester of Cleveland Fed and Eric Rosengren of Boston Fed voted in favor of an immediate hike.

It’s likely that the Fed would hike rate in its December meeting, however, we expect the FOMC to remain divided even then. The dollar has weakened post-FOMC. The dollar index is currently trading at 95.25, down a quarter percent today.