FOMC Monetary Policy June 2019: Assessing future bias from statement and projection materials

As expected, the policymakers at FOMC kept interest rate unchanged at yesterday’s meeting. Current Federal funds rate target 225-250 basis points.

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

• Improvement in the labor market remains strong, and the economy expanding at a moderate rate. (Dovish bias, as Fed acknowledges economic slowdown)
• Job gains remain solid, and the unemployment rate low. (Mild hawkish bias; positive statement despite economic slowdown but same as before)
• Household spending picked up the pace. (Hawkish bias)
• Business fixed investment have been soft. (Mild dovish bias)
• Inflation both including and excluding energy and food, consumer prices is running below 2 percent. Indicators of longer-term inflation measures little changed, on balance. (Mild dovish bias as the Fed changed the language to below 2 percent from close to 2 percent)
• The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. (Dovish bias)
• The decision was not unanimous as James Bullard wanted the FOMC to reduce rates at this meeting. (Dovish bias)

The statement was much dovish than the last statement which was also quite dovish.

Now, let’s take a look at the changes made in the projection materials.

• FOMC upgraded its growth forecast for 2020 from 1.9 percent to 2 percent. (Mild hawkish bias because Fed expects the growth to continue)
   
• FOMC upgraded its unemployment rate forecast for 2019 from 3.7 percent to 3.6 percent, from 3.8 percent to 3.7 percent for 2020, and from 3.9 percent to 3.8 percent for 2021. (Mild hawkish bias)
   
• FOMC downgraded inflation forecast for 2019 from 1.8 percent to 1.5 percent. The reduced projection for 2020 by 0.1 percent to 1.9 percent. (Dovish bias)
   
• FOMC downgraded core inflation forecast for 2019 from 2 percent to 1.8 percent. The reduced projection for 2020 by 0.1 percent to 1.9 percent. (Neutral bias)
   
• FOMC downgraded rate forecast by 50 bps for 2020 as per the median. But the central tendency declined by 50 bps for 2019. (Dovish bias as the next meeting move could very well be a cut)

On balance, the Fed statement was pretty dovish, and without inflation shooting above the target, the Fed is likely to deliver cuts.