Reactions to the July 2015 FOMC statement, extended comments from RBC Economics

Bolding is mine:

  • The statement reiterated that the timing of a rate hike is dependent on the evolution of the economic data, thereby leaving the door open to a rate hike occurring at any upcoming meeting
  • The statement was very similar to ... June ... although the tweaks made to the text suggested that the Fed views conditions in the housing and labour markets as having improved incrementally
  • "some further improvement in the labour market" would be needed before it is appropriate to raise the policy rate, ... a slight deviation from ... June when "further improvement" was needed

On balance, the tweaks hint that the Fed is one- step closer to raising the fed funds target, and we look for the first increase to be announced in September 2015

Statement pointed to the economy "expanding moderately"

  • Acknowledged the improvement in labour market conditions ... the amount of "underutilized labour resources" having been reduced since the start of 2015
  • Consumer spending increased at a moderate pace
  • Fed stated the housing market was undergoing "additional" improvement
  • Weakness in exports and business investment was once again noted
  • Inflation backdrop was in line with the previous statement (headline rate expected to rise toward the 2% objective in the medium term)
  • Risks to the outlook for growth and employment are "nearly balanced

RBC Outlook:

  • We anticipate that the Fed will begin its rate-hiking program in September
  • Recent data point to a sharp rebound in economic growth in the second quarter of 2015
  • We expect the second-quarter 2015 real gross domestic product (GDP) report will show that the economy grew at a 3% annualized rate, thereby confirming that the mild 0.2% dip recorded in the first quarter reflected transitory factors rather than a signal that the US economy had entered a period of very slow growth
  • Labour market conditions continue to tighten with the unemployment rate falling to 5.3% in June, thereby approaching the 5.0% to 5.2% range that the Fed deems to represent full employment
  • Strengthening growth and persistent, robust employment gains are expected to result in a firming in inflation pressures in the quarters ahead augmented by an easing in the weight from lower energy prices and currency strength on import prices
  • Continuation of these trends heading into the September 17, 2015 FOMC meeting will likely provide the data- dependent Fed with sufficient justification to begin to pare back policy accommodation with a 25 basis point increase in the fed funds target band, even with the inflation rate holding below its medium-term target.