The Federal Reserve stuck to its strategy despite recent disappointing
data. It still envisions another rate hike this year and being able
to begin reducing its balance sheet later this year.
Throughout the recovery and expansion, the Fed has underestimated how fast the unemployment rate
fall. They have again revised lower where the unemployment rate is headed. Moreover, the Fed edged its
core PCE forecasts lower, and the median
fell to 1.7% from 1.9%. However, in 2018 and 2019, the Fed still thinks
its 2.0% target will be reached.
There was a single dissent from the decision to hike rates.
Kashkari dissented. It is not very surprising. He has been
particularly dovish due to the easing of price
pressures.
The Fed’s statement also provided more details about the balance
sheet. It will allow up to $10 bln a month ($6 bln Treasuries and $4 in MBS) that will not be replaced by
maturing issues. The monthly amount will increase quarterly by $6
bln and $4 bln for Treasuries and MBS respectively. This will be allowed to gradually increase to $30 and $20 bln It anticipates that it
will be the balance sheet operations
later this year, with an important caveat, the economy needs to “evolve broadly as anticipated.” This seems a somewhat
more aggressive path than many economists had anticipated.
The dollar firmed in response to the FOMC statement, and yields across
the coupon curve rose a couple of basis points, paring the earlier sharp drop
recorded in the wake of another series of poor data (weaker retail sales,
softer CPI, and a draw down of business inventories. To be sure,
Yellen reiterated that the Fed funds target remains the primary policy tool,
but it will use all tools at its disposal should they be necessary.
Yellen’s remarks seemed to play down the pullback core PCE deflator. She
seemed to dismiss it as a bit of a statistical fluke involving the price of
wireless telephone service and prescription drugs. She cautioned against over-emphasizing short-term high frequency data. Again, the deviations
from the Fed’s expectations are not seen
as major or sustainable. The Fed still see the Fed funds rate target as
still below neutral. The dollar pared more of its earlier losses in
response to Yellen’s initial remarks.