Despite the recovery in the labor market and the economic activities, the Federal Reserve decided to keep the monetary policy unchanged. The Federal Open Market Committee maintained the target range for the federal funds rate at 1/4 to 1/2 percent and concluded that near-term risks to the economic outlook have diminished.
After the additional 287, 000 jobs last month, the FOMC indicated in their report “Job gains 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. Household spending 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.
However, the Committee was still looking for price stability and further improvement of the employment data before pursuing the rate hike. The central bank assumes that economic activity will expand at a moderate pace and labor market indicators will strengthen if it implements gradual adjustments in the monetary policy.
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 has left the door open for a rate hike possibly this September as it continues to closely monitor inflation indicators and global economic and financial developments. The next policy meeting of the central bank in September will weigh in on the jobs reports in July and August together with the inflation and the spending data.
Clearly, the central bank seemed confident in the turn of market data in the next few months and it has probably adjusted in the impact brought by post-Brexit sentiments. Other central banks such as the European Central Bank and the Bank of England indicated on their respective reports that it was too early to fully gauge the effect of Brexit in the global economy.
On the other hand, experts thought that the central bank wants to be extra cautious. “The statement has a bit better tone, reflecting significantly better data relative to expectations over the last six weeks. However, the Fed has gotten wise to the fragility of markets. They kept in that they're still monitoring financial conditions, so even though many things broke positively for the Fed since their last meeting,” an economist from a German global banking said.
Separately, the greenback remained moderately low against other currencies as the market digested the outcome of the Fed meeting. The yen rally in Asia as investors closely watched the statement of Governor Haruhiko Kuroda after the Bank of Japan's two-day policy meeting.