Fed meeting is not “live” - BBH

The upcoming Federal Reserve meeting is not “live” in the sense that anyone expects a change in the policy of any kind, explains the analysis team at BBH.  

Key Quotes

“For reasons beyond our ken, the Federal Reserve insists on making changes only at the half of the FOMC meetings which are followed by a press conference.  There are several workarounds including, as we have suggested, such as holding press conferences after every meeting, which the ECB and BOJ already do, for example.”  

“In any event, the market understands full well where the Fed is.  It is getting close to allowing its balance sheet to begin shrinking.  After raising rates in March and June, officials are not ready to go again, at least not in July nor September.  December is a closer call.  The softer price pressures rather than, the weaker growth impulses become the focal point in Q2.”  

“It will take a few months of data to assuage these concerns.  The main argument that what the headwind on prices is transitory seems to assume that decline in prices is narrow.  Breadth indicators of price changes, therefore, be more important than usual in the current context.  Sure enough, the diffusion indicators for the CPI were narrow, until the recent June reading.”  

"When the balance sheet issue was being discussed, NY Fed President Dudley suggested that the central bank may have a brief pause in its efforts to normalize the Fed funds target rate around the time that it decides to begin allowing the balance sheet to shrink.  This still seems the most likely scenario.  Given the apparent consensus to begin not reinvesting in full the proceeds from maturing issues sooner rather than later, the September FOMC meeting is a compelling venue to make such an announcement.  Deferring a rate decision until the December meeting, by which time the inflation picture may have clarified, seems prudent.”  

“One of the consequences of this scenario is that it would allow Fed officials to talk more about why the core inflation measures have weakened.  An FOMC statement that does not show more puzzlement, if not a concern, risks a more dramatic reaction a couple of days later when the first estimate of Q2 GDP is reported.  The GDP price deflator is expected to slow to 1.3% from 1.9%.  Of potentially greater importance, the core PCE deflator may slow more dramatically--to below 1% from 2.0% in Q1.  At the same time, these GDP figures are reported, the US will release its Q2 estimate for Employment Cost Index, a broader measure of labor costs (includes wages and benefits), which is also expected to show no acceleration in what is understood to be a key driver of core inflation.”