Bank of the West US Outlook Report: Dissecting FOMC Intentions
Don’t waste a lot of time dissecting the July FOMC statement. The Federal Reserve remained coy in their July statement released on Wednesday about when they plan to initiate their first Fed funds interest rate hike.
The lack of clear hints in the July FOMC statement about when the Fed will be raising interest rates is no surprise, given the FOMC’s data-dependent nature, and unwillingness to be painted into a corner by the markets should economic or financial conditions shift between now and the September meeting. Ultimately, the lack of hints in the FOMC statement tells us little about the timing of the first interest rate hike. So rather than parsing each verb and adjective in the statement, it helps to focus on the facts as they stand right now.
One, the Fed continues to inch closer to its monetary policy goals. The rebound in second-quarter U.S. GDP growth of 2.3% is still well above the Fed staff’s estimate of potential long-term growth of 1.6%. This means just maintaining growth rates of comparable magnitude in the quarters ahead should continue to sustain strong job growth and declining unemployment rates.
We only have two more nonfarm payroll reports before the September FOMC meeting, the first one coming next Friday. We are forecasting that another net 224K nonfarm jobs were created in July, bringing the year-to-date total to 1.474 million, and the three-month average monthly gain to 234K. We expect the unemployment rate to hold steady at 5.3 percent.
Bottom-line, it shouldn’t take much additional improvement in labor market conditions or inflation trends to get the FOMC to test the waters with an initial rate hike. My current baseline Fed forecast is for the first interest rate hike by the FOMC in September, but with the next one not occurring until the January 2016 FOMC meeting.
Despite the seemingly lackadaisical response of the equity markets to the July FOMC statement. There does appear to be a growing realization in the Treasury market that the Fed will be moving soon. Since the July 8 low, 2-Year Treasury yields have moved up 19 basis point to 0.73 percent back to December 2014 highs.
A heavy schedule of U.S. reports next week will give FOMC members plenty to consider, including July payrolls on Friday, personal spending, ISM PMI’s, vehicle sales, and construction spending. I expect a unanimous message from these indicators: Economic progress continues at a solid clip.
To find out more, check out this week’s US Outlook Report.
Tags: economy, employment, united states