FOMC preview: no major announcements on the balance sheet expected

Analysts at Nomura's preview of this week's FOMC meeting (Wednesday) . . .

Key Quotes:

"For the July FOMC meeting, we expect no changes in interest rates and no major announcements on the balance sheet."

Based on Chair Yellen’s recent congressional testimony, remarks by FOMC participants and the minutes from the June FOMC meeting, we hold that the timing of the balance sheet roll-off will be made in September, not July. Further, it would not be surprising if the statement included additional signals that the Committee expects to take this decision at the September meeting. For other changes in the statement, we will be looking especially at the language on inflation.

During a 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 the uncertainty about inflation – in particular “… 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, core goods CPI inflation for June, released on 14 July, came in weak despite an absence of external shocks. Against this backdrop, we think the July FOMC statement may provide some additional color on the recent underperformance of inflation in its assessment of current economic conditions. However, we do not expect the FOMC's basic views on the economy to change materially with its 2017 growth pace roughly in line with the Committee’s outlook. On the FOMC’s future economic outlook, we expect balanced risks with no major changes."

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