Fed: Practically no chance of a new policy initiative - BBH

By definition, the Federal Reserve Open Market Committee meeting is the highlight of the day and without a press conference and following last month's rate cut, there is practically no chance of a new policy initiative either on the balance sheet or the Fed funds target.

Key Quotes

“Market participants will be most sensitive to how the FOMC statement discusses inflation.  In June, the FOMC recognized that inflation had declined and the core was below target.  It expected inflation to remain below 2% in the near-term, but stabilize around 2% in the medium term.  Lastly, as the Chair noted in her testimony before Congress, the FOMC statement also indicated that it would monitor inflation closely.”

“There has not been sufficient data to require a significant change in the Fed's statement.  The Fed can show patience.  There is no rush.  After declining from February through May, core inflation needs to not only stabilize, as core CPI did last month.  It needs to rise for perhaps a few months before a cautious central banker may feel confident that the soft patch has passed.”

“The scenario we painted after the last FOMC meeting (which sees the Fed announcing the beginning of its balance sheet operations at the September meeting to start in October, and to pause in its rate hikes, after hiking quarterly for three quarters) is gaining adherents.  By December, the trajectory of prices, and the economy will be clearer.  In this way, the Federal Reserve can achieve a number of its objectives, including beginning the slow reduction of its balance sheet and distancing it from the conduct of monetary policy.  The Fed funds target range is viewed as the main policy tool, with the yield on reserves (not just excess reserves, a point that is not fully appreciated) and reverse repo operations.”

“The US dollar is sporting a slightly firmer bias.  The biggest loser today is the Australian dollar, which is off nearly 0.5% following a soft headline inflation figure and comments from the central bank governor indicating a lack of urgency to change interest rates.”