US Fed to keep target range for federal funds rate unchanged during July meeting

The Federal Open Market Committee (FOMC) had maintained its policy rate at 25-50 basis points during its June meeting amidst a significant deceleration of employment growth in May and the pending UK referendum in EU membership. Given the higher uncertainty in context of the domestic labor market, certain participants have provided shallower expected policy path than was the case in March, said Barclays in a research note.

Even if the median participant still projected two rate hikes this year, six FOMC participants during the June FOMC meeting anticipated just one hike by the end of 2016. The committee also ignored characterizing the balance of risks, saying that “the committee continues to closely monitor... global economic and financial developments.”

“We expect the Fed to leave the target range for the federal funds rate unchanged at 0.25- 0.50% at its July meeting as it debates to what degree the softening in employment growth owes to transitory factors and the extent to which risks from abroad have diminished”, noted Barclays.

The statement is expected to bring about a careful balance between noting that employment in June recovered sharply and accommodative financial conditions post the Brexit vote against the wish to witness additional evidence that the momentum in labor market would keep the US economy in an above-potential growth path, according to Barclays.

“Too much caution would remove optionality for a September hike (our baseline) and likely preclude the possibility of two hikes before year-end,” added Barclays.

Participants are expected to be hesitant in putting weight on the recovery in employment in June. Overall, July statement is expected to have a neutral tone.

Meanwhile, the committee, during the June FOMC meeting had restricted data to assess the economic growth rebound after the deceleration in the first quarter. It stated that economic activity growth seemed to have picked up. Data for June retail sales and May personal spending indicated towards a strong acceleration in personal consumption expenditures in the second quarter. Moreover, housing data implied that the sector continues to grow modestly.

In the mean time, motor vehicle production and recovery in utilities and mining stimulated industrial production in June. However, weakness in energy and mining activity in the second quarter is likely to be a drag on structures investment that might drop for the fourth straight quarter.

“Since the Fed last met in June, our Q2 GDP tracking estimate has moved modestly higher to 2.8 percent from 2.5 percent, with 4.5 percent growth in private consumption offsetting weakness in business fixed investment, trade, and government spending,” stated Barclays.