Today’s FOMC meeting is one with forecasts’ update and press brief, a good opportunity for policy change. Necessary conditions are not always sufficient, and we do not expect the Fed to change its policy stance.
August’s financial turmoil is not the reason why. Admittedly, jittery financial markets reminded Fed officials that policy decisions can have huge impacts. This is reason for the Fed to try and be crystal-clear about future steps, not to postpone decisions otherwise seen as necessary.
Fed officials are increasingly uncomfortable with the zero-rate policy, especially with the unemployment rate down to the NAIRU estimated level.
Still, with core inflation stable and low, an expensive dollar and no sign of accelerating wages, there is no reason to rush the normalisation.
Next week, the FOMC meeting will see the release of the updated economic projections from members while the Chair, Janet Yellen, will give a press brief. These particularly full of information meetings, happening four times a year, are seen as the best ones to announce policy changes, even if FOMC members have claimed several times that every meeting is the occasion of a move. Before the summer, some expectations for a September 25 basis points hike were building. Admittedly,
August was everything but a quiet month for financial markets.
The sell-off on the Shanghai stock exchange market, together with the surprise depreciation announced by the Chinese authorities led to large movements in stock prices, government bond yields and exchange rates. On an intraday basis, while the yield on the US 10-year Treasuries was as high as 2.29% on August the 5th, it temporarily touched 1.90% on August the 24th. As for the EUR/USD, it went from a low 1.08 on the 5th to a high 1.17 on the 24th. This was enough for scrapping expectations of a September Fed rate hike. As for now, things calmed down: Treasury yields are more or less back to their early August levels, while against the euro the dollar is marginally cheaper. What is definitely more crucial for the Fed is the fact that the inflation outlook remains unthreatening.
The latest available data for PCE inflation – the price index for personal consumption expenditures, which the Fed targets at 2% y/y over the medium term – shows it remained stable at 0.3% y/y in July.
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by Alexandra ESTIOT