FOMC meeting: Inner circle of FOMC tilts towards one hike this year

Bar for rate hike in September has been raised

The June FOMC meeting was generally more dovish than we expected. The dot plot showed the median projection for the fed funds rate at end 2015 was unchanged at 0.625% but this masks a tilt towards just one rate hike for the most influential members of the FOMC. There are now seven members expecting only one hike or less this year compared to three in March. Importantly, the five seeing one hike this year are likely voting members of the FOMC and are likely to include both Yellen and Dudley (see table overleaf). Hence, to get a first hike in September the current positive momentum in the data needs to continue in the coming months, as the inner circle of the FOMC is currently tilting towards waiting till December (although the one hike could also refer to September). The median fed funds rate projection for 2016 and 2017 was revised down by 25bp which leaves the median pace of hikes in 2016 at 100bp and 125bp in 2017. There was very little change to the longer-term fed funds rate projections, and the median remains at 3.75%.

The FOMC lowered its Q4 GDP growth projection to 1.9% yoy which is in line with our expectation for the year and its unemployment rate projection for Q4 this year was revised up to 5.2-5.3% from 5.0-5.2% in March. In the press conference, Yellen indicated that slower progress in the reduction of the unemployment rate in the FOMC forecast was largely due to an expected pick up in labour productivity. Apart from this, the FOMC’s projections were little changed and there were no revisions to the longer-run projection for GDP growth, inflation or unemployment.

Turning to the statement, the language on the current state of the economy was more positive than in April, reflecting the recent run of positive data. “Activity expanded moderately” compared to “slowed”, “pace of job gains picked up” compared to “moderated”, “underutilization of labor resources diminished somewhat” compare to “was little changed” and “household spending has been moderate and the housing sector has shown some improvement”. However, the forward looking part of the statement was essentially unchanged compared to April, so really not much information there.

We had expected Yellen to use more hawkish language at the press conference in order to prepare markets for an upcoming rate hike. However, there was not much in her comments that suggested an imminent rate hike. This supports our analysis above, that Yellen is likely among the five members projecting just one hike this year.