FOMC says What it Had To, No More or Less

The Federal
Reserve met market expectations fully.
  It upgraded its assessment of the economy,
recognized that the near-term risks had diminished, and remained committed to
normalizing monetary policy.    There was
one dissent from the steady stance, and it the KC Fed President had already
tipped her hand. 
There was little
direct guidance about the September meeting or
whether most Fed officials still saw two hikes this year, as they seemed to
last month. 
This is not particularly surprising,
and reading between the lines, a single hike this year is the most likely
scenario. 
Besides upgrading the economic assessment and George’s dissent, there was
only one major change in the statement, and that was a single sentence:  “Near-term risks to the economic outlook have
diminished.”
  This statement and the
re-introduction of a risk assessment is understood by many participants as
necessary step before resuming the normalization process. 

After today, there are three meetings left for this year, September, November,
and December. 
The November meeting is
too close to the elections for the Fed to move. 
This judgment is made by examining the modern history of the conduct of
Fed policy.   However, the Fed has moved in September of presidential
election year, and as we know from last year too, year-end considerations do
not prevent a move in December.

There has been a clear pattern of the US economy in recent years.  A weak Q1 is followed by a stronger Q2.  This is being played out again this
year.  The economic performance in Q3 is
critical.  The NY Fed’s GDPNow tracker
projects faster growth in Q3 than in Q2, but these kind of models are volatile. 
The September meeting is late in the month.  Fed officials will see two more employment
reports and more cyclical data before they meet again.  Yellen will speak this year at the KC Fed’s
gathering in Jackson Hole at the end of August. Intended or not that speech
will help shape market expectations for the September and possibly, the
December meetings.  The market is more
inclined to see a December hike than September. 
By our calculation, the market is discounting about a 75% chance of a
hike at the end of the year. 

The US dollar initially rose in response to the statement but quickly reversed.  US coupon yields eased.   Stocks
recouped their earlier losses. 

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