Analysts at Nomura expect no major policy changes or announcements at this week’s FOMC meeting as Chair Yellen’s congressional testimony last week, recent remarks by FOMC participants, and the minutes from the June FOMC meeting all suggest that the Committee will wait to confirm that the economy, including inflation, is on track before raising rates again.

Key Quotes

“On the other hand, those same statements confirm that the Committee is moving towards a change in its balance sheet policy. Yellen indicated as much in her testimony, but she did not link the balance sheet decision to economic developments, suggesting that it could come before current uncertainty on the trajectory of inflation is resolved. Statements from several FOMC participants – Presidents George, Kaplan and Mester – suggest that in the meeting this week they will argue to start the process of balance sheet roll off immediately. However, it seems unlikely that the Committee will take such a decision this week. First, this is an important change in policy and we think that the Committee will want Chair Yellen to have the opportunity to explain the decision at a post-meeting press conference. Second, public statements from FOMC participants have not given us the sort of coordinate message that we got before the March FOMC meeting. In that case, a series of public statements from FOMC participants moved market expectations for a rate hike at the March FOMC meeting in a very deliberate, and effective, way. We have had no such communications blitz in the run up to the July FOMC meeting.”

“We expect the FOMC to announce a decision to start to let the balance sheet roll off after its meeting in September. While we do not expect the FOMC to “pre announce” such a decision next week, it would not be surprising if the statement included some hint that the Committee expects to take this decision at the September meeting.”

“Moreover, we will be looking especially at the language on inflation. During her semiannual testimony before Congress on 12 July, Chair Yellen acknowledged that “the recent lower readings on inflation are partly the result of a few “unusual reductions in certain categories of prices.” On the other hand, she also mentioned “… uncertainty about when – and how much – inflation will respond to tightening resource utilization”— as one of the key risks to the outlook. Following her testimony, on 14 July, core goods CPI inflation for June came in on the weak side again, leaving the question of how much of the recent weakness is transitory still unresolved. Against this backdrop, we think the July FOMC statement may provide some additional nuance on how the FOMC sees the recent underperformance of inflation, although we expect the main message that the FOMC expect inflation to move up to its 2% target over the medium term to be reiterated. Other than inflation, we do not expect the statement’s views on the economy or the economic outlook to materially change.”

“In addition, the nominee for Vice Chair of Supervision, Randal Quarles, will have his confirmation hearing on 27 July.”

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