June FOMC statement: As dovish as they dare
As we expected, the FOMC sees an acceleration of activity in the intermeeting period, especially in the area of household spending. The committee minimized the weakness in labor markets, saying that the “pace of improvement in the labor market has slowed” and said it expects “labor market indicators [to] strengthen.” More important, and in contrast to the committee's dismissive view of the labor market slowdown, the dot path flattened considerably. We had expected a 25bp reduction in the median path of policy in 2017, 2018, and in the long-run, but the decline in 2018 was more than we anticipated. Hence, a somewhat constructive FOMC statement that keeps the door open for a rate hike in the July-September period was, in our view, more than offset by a significant flattening in the expected policy path. Furthermore, although the median member is still calling for two rate hikes in 2016, six members expect only a single rate hike this year. We believe Chair Yellen belongs to the latter group.
As such, we retain our baseline outlook for one rate hike this year, in September, though the timing will be highly dependent on the evolution of domestic activity, especially a rebound in labor markets. We believe the hurdle for a July hike has moved higher and the statement confirms our belief that the committee will feel most comfortable once it has seen several months of solid labor market data, given the extended period of slowing so far this year.
We note that one FOMC member moved to no additional hikes over the forecast horizon. This is consistent with our view that a further softening in labor markets could signal a significant shift in Fed policy. This is not our baseline assumption, but we raise the point to say that Fed policy feels bi-modal as labor market data have historically sent a strong signal about expansions and contractions.
