FOMC reviewed: weakness in inflation may not be entirely transitory - Nomura

Analysts at Westpac explained that as expected, the Federal Reserve announced the beginning of balance sheet normalization after today’s meeting. We expect normalization, starting in October, to largely progress in the background as the Fed focuses on managing short-term rates for monetary policy. 

Key Quotes:

We found the overall message from the FOMC today to be slightly hawkish regarding the trajectory of short-term rate policy. The median midpoint for the fed funds target range at the end of 2017 was unchanged and, more importantly, the number of participants expecting no further hikes this year was unchanged from the June meeting. The statement indicated a willingness to look through data distortions from the hurricane season.

The Summary of Economic Projections (SEP) and dot plot were largely in line with our expectations. The distribution of the projected appropriate fed funds rates (“dots”) for 2017 and 2018 was shifted slightly lower, but the medians were unchanged. The median dots for 2019 and longer run, on the other hand, both fell 0.2pp. The decline in the longer-run dots was expected considering recent statements by participants on their view that the neutral rate is expected to stay low.

Elsewhere, changes were small and within our expectations. The median unemployment rate forecasts for 2018 and 2019 fell by 0.1pp, but the longer-run rate remained unchanged. This implies that members may expect the labor market to continue to add jobs above the sustainable pace in the medium term. The median core PCE inflation forecast was lowered by 0.1 pp in 2017, likely reflecting recent weak inflation data. Further, the median forecasts of overall PCE inflation and core PCE inflation for 2018 also fell by 0.1pp, likely reflecting the views that some of the weakness in inflation may not be entirely transitory. More importantly, the median of inflation forecasts for the longer run and for 2019 were unchanged at 2.0%."