Updated: 07-24-2015The Federal Reserve has developed a knack for taking a reportedly climactic Federal Open Market Committee (FOMC) meeting and turning it into something anti-climactic for the capital markets. It did so again on Wednesday, June 17, by issuing another carefully worded policy directive that was neither too optimistic nor too pessimistic.
In other words, the FOMC left market participants playing a guessing game as to when the first increase in the federal funds rate since June 2006 might occur. In doing so, it likely ensured that the choppy action in the range-bound equity market is apt to persist in the near term.
The directive acknowledged that the pace of job gains picked up, that the underutilization of labor resources has diminished somewhat, and that the housing sector has improved some. It was noted that inflation continued to run below the Committee's longer-run objective due in part to earlier declines in energy prices, but that energy prices appear to have stabilized.
Once again, it was noted that the FOMC thinks it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
On a related note, the number of FOMC participants thinking the appropriate timing of policy firming would be in 2015 was unchanged at 15 along with the number of participants (2) who felt it would be appropriate in 2016. In turn, it was revealed that the midpoint for the target range in 2016 was reduced by 25 basis points to 1.625%. The midpoint for the target range in 2017 was also lowered by 25 basis points to 2.875%, whereas the longer run midpoint of the target range was left unchanged at 3.75%.
The vote at the June meeting, which also included updated central tendency economic projections
, was unanimous.
In terms of the projections, there wasn't much change. The only real change of note was the downgrade to the change in real GDP for 2015. It went from 2.3% to 2.7% at the March meeting to 1.8% to 2.0% at the June meeting. That downgrade was all but guaranteed with the haggard economic performance in the first quarter, which was most recently estimated to have contracted by 0.7%.
The Federal Reserve has repeatedly overestimated its growth projections, so even the downgrade to the central tendency projection for 2015 real GDP growth qualifies as more of the same in the context of an overall presentation coming out of the June meeting that qualifies as more of the same.
That being the case, market participants are interpreting things in a dovish fashion since it has provided yet another stay of execution a while longer on killing the policy of holding the target range for the federal funds rate at the zero bound. That sense of things manifested itself in the U.S. Dollar Index, which extended its losses after the directive was released, in the 10-yr note, which cut its losses after the directive was released, and in the stock market, which pushed higher after the directive was released.
The reaction in the immediate aftermath of the Fed's policy decision (or is it indecision?) should not be regarded as inviolate. Uncertainty produces volatility.
The market might know today that the fed funds rate is going to remain at the zero bound, yet the specter of a rate hike before the end of the year will continue to hang over the market. That understanding means the market action is primed to hinge on each piece of economic data that either supports or negates the thought of such timing.
--Patrick J. O'Hare, Briefing.com