US : The hawks strike back

The expectations for a more hawkish tone were building: financial markets were expecting the Fed to skip the reference to a considerable period. It chose not to, giving some dovish hints to the statement. As hawks dissented, economic projections were scaled back, the slack in the labour market was further emphasized and as the Fed simply recognised missing one of its target, it looks like the doves won

• The FOMC decided not to change anything, neither its policy nor what it says about the future. Rates were left unchanged and the pace at which the Fed increases its balance sheet – through debt security purchases – was once more cut by USD 10 bn to USD 15 bn (USD 10 bn of long-term Treasuries and USD 5 bn of Agency MBS). The US central bank will keep its current policy of reinvesting principal payments from its holdings of Agencies and Agency MBS in Agency MBS and of rolling over maturing Treasuries at auction. As previously spelled out, it will announce the end of QE3 at its next meeting.
  
• What came to some as a surprise is the fact that FOMC members decided to keep the exact same wording for its forward guidance, i.e. : “The Committee continues to anticipate […] to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends…”. In short, some more hawkishness was rather largely expected, and the Fed did not provide.
  
• On top of deciding to keep unchanged the forward-guidance, the FOMC statement sounds slightly less optimistic than the previous one. Activity was said to have rebounded in June and is now said to grow at a moderate pace. Previously, the improvement in the labour market and the decline in the unemployment rate were mentioned. Now, the labour market is said to have improved “somewhat” further and the stabilisation of the unemployment rate is stressed. Additionally, the wording about the “significant underutilization of labor resources”, even if unchanged, now has a sentence for its own, which stresses the importance of those words further.
  
• The final element that definitely makes this statement more dovish than expected by some is that the hawks dissented. Richard W. Fisher (Dallas Fed President) and Charles I. Plosser (Philadelphia Fed President). The former believed that the Fed will have to normalize policy sooner than currently suggested by the forward-guidance. The latter also objected to keeping the wording of the forward-guidance as, according to him, it ”does not reflect the considerable economic progress that has been made toward the Committee's goals”.