United States: Fed holds fire in July as inflation data continues to disappoint
July 26, 2017
At its 25–26 July meeting, the Federal Reserve’s Open Market Committee (FOMC) decided to maintain its target for the federal funds rate at a range of between 1.00% and 1.25%, following an active start to the year which has seen two rate rises in quick succession. The decision was in line with market expectations. The Committee also reiterated its intention to begin to unwind its USD 4.5 trillion balance sheet, the first operational details of which were set out at June’s monetary policy meeting, which could occur as soon as September.
The FOMC’s decision comes as both inflation and core inflation have dipped below the 2.0% inflation target in recent months despite a weakening of the U.S. dollar, and the Bank acknowledged that this scenario is likely to continue in the near term. By avoiding immediate monetary tightening, the Fed should help bump up inflation and ensure inflation expectations remain well anchored. On the demand side, the labor market has continued to strengthen this year, with solid payroll growth and a fall in the unemployment rate, while household spending and business fixed investment have expanded. Leaving the monetary stance unchanged should ensure these positive tendencies continue, and help the Fed meet its objective of maximizing employment.
The U.S. dollar weakened and treasury yields dipped immediately after the meeting, despite the imminent balance sheet shrinkage, as investors reacted to a perceived dovish tone from the Fed’s communique and the recognition that inflation will continue to run below target in the immediate future. Although soft inflation numbers could indeed encourage the FOMC to move somewhat more gingerly in the immediate future, the Federal Reserve once again stated its intention to keep gradually increasing rates. This is in line with the forecast of FocusEconomics panelists, who expect tightening to continue and gather pace next year.
Author: David Ampudia, Economist