4 Takeaways from the July FOMC Statement

Hi, forex friends! If you somehow missed it, the Fed released its official FOMC press statement yesterday, and the Greenback tanked pretty much across the board. Wait, what? Looks like it’s time for us to sniff around for some clues in the latest FOMC press statement, so let do that, shall we?

USD Index: 15-Minute Forex Chart

USD Index: 15-Minute Forex Chart

1. FOMC members voted to maintain policy

Five FOMC meetings down and only three more to go, and still the FOMC members voted to maintain the federal funds rate in a target range of 1/4 to 1/2 percent. As to why the Fed officials voted to keep rates steady, the Fed had this to say: “The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

2. Vote to maintain policy was not unanimous

Kansas City Fed President Esther L. George has been the most hawkish voting FOMC member, but even she was forced to vote to keep rates steady during the June FOMC meeting, very likely because of the dismal May NFP report. However, she flipped back to her usual hawkish self during the recent meeting and voted for a 25 bps rate hike then and there, as you can see on the voting records below.

FOMC: June Voting Record

FOMC: June Voting Record

FOMC: July Voting Record

FOMC: July Voting Record

3. Overall positive views on the economy

Growth

The Fed said that “economic activity has been expanding at a moderate rate” and the Fed expects that the U.S. economy will continue to expand at a moderate pace. Hmmm. No upbeat remarks on the expected rebound in Q2 GDP growth, so do be careful if you’re planning to trade this Friday’s advanced Q2 GDP estimate (read my Forex Trading Guide here).

The Fed did note that “Household spending has been growing strongly,” which is good since consumer spending has been the backbone of the U.S. economy and the Fed’s conclusion is also the same to the one I made in my most recent economic snapshot of the U.S. economy. However, the Fed also retained its usual statement that “business fixed investment has been soft,” which may not have a very large negative impact on GDP growth, but persistent contractions or weak growth in business investment would have long-term negative implications for the U.S. economy.

Inflation

The Fed complained that “Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low.” However, the Fed is also bit optimistic since it expects inflation “to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”

Labor Market

The Fed seemed rather relieved when it said that “the labor market strengthened,” adding that “On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.” This is to be expected, I suppose. After all, the minutes of the June FOMC meeting revealed that Fed officials devoted a large chunk of their discussions on the dismal May NFP report.

Risk Factors

There was a very conspicuous addition in the recent FOMC statement, namely that “Near-term risks to the economic outlook have diminished.” The FOMC members still tried to balance this rather upbeat addition by saying that “The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

4. No forward guidance

Given the diminishing risks to the economic outlook, the rebound in employment, the robust levels of consumer spending that would fuel the anticipated moderate pace of economic growth, and expectations that inflation will steadily climb higher, the Fed should have sounded a bit more hawkish when it came to the future path of monetary policy.

Instead, the Fed opted to keep a neutral tone, repeating its usual line about the path to tightening being a gradual one and that their policy decisions are data-dependent. And this lack of forward guidance (or a more hawkish tone at least) despite the overall positive views on the economy weakened rate hike expectations, in my humble opinion, and is the reason why the Greenback ultimately tanked.

This is reinforced by the CME Group’s FedWatch Tool, which showed that the market has priced-in an 18% probability for a September rate hike, down from 19.5% the day before the FOMC statement.

CME Group: FedWatch Tool

CME Group: FedWatch Tool

What do you think? Are you still expecting a rate hike within the year? If you are, how many rate hikes do you think there will be, given that there are only three FOMC meetings left? Share your thoughts by answering the poll below!

 

 

Bonus: Spot the Difference!

As usual, you don’t actually have to do that since I already did that for you, but here it is, just in case you want to see the actual press statement with the differences highlighted. Do note that colored words or phrases are additions introduced in the July statement (blue = hawkish, red = dovish, green = neutral) while those which have a strike-through are from the previous release.

Information received since the Federal Open Market Committee met in June April indicates that the the pace of improvement in the labor market has slowed while growth in strengthened and that economic activity appears to have picked up has been expanding at a moderate rate. Although the unemployment rate has declined, Job gains have diminished were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Growth in Household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.


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