FOMC monetary policy June 2017: Assessing future bias

As expected, the policymakers at FOMC hiked policy rates by 25 basis points yesterday.  Let’s take a look at the FOMC statement for future clues. Current Federal funds rate target 100-125 basis points.

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

• Improvement in the labor market strengthened, economic activity rising moderately. (Mild hawkish bias)
• Jobs gain moderated but solid on an average. The unemployment rate declined. (Mild hawkish bias)
• Growth in household spending picked up in recent months. (Mild hawkish bias)
• Business fixed investment continued to expand.  (Mild hawkish bias)
• Inflation measured on a 12-month basis has declined recently. Excluding energy and food, consumer prices declined in March and inflation continued to run somewhat below 2 percent. The market-based measure of inflation compensation low. Survey based inflation measure unchanged. (Mild dovish bias)
• FOMC expects gradual policy adjustments and expects further strengthening in the labor market. Inflation is expected to remain below 2 percent in the near term but reaches targeted 2 percent over the medium term. (Neutral bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and the rate to remain below longer run levels. (Neutral bias)
• The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities. (Hawkish bias)

The statement is much more hawkish compared to the April statement, as it indicates that it is keeping its options open for a third rate hike in 2017 and also adjustments to its balance sheet but subsequent hikes would depend on how economic conditions develop and also on the government’s fiscal stance.

The decision was not unanimous. Neel Kashkari dissented the rate hike. Next policy announcement date is 26th July 2017.