FOMC Monetary Policy September 2017: Assessing future bias from statement and projection materials

As expected, the policymakers at FOMC signaled balance sheet reduction beginning in October. Let’s take a look at the FOMC statement and projection materials for future clues. Current Federal funds rate target 100-125 basis points.

Let’s first assess the bias in monetary policy statement –

• Improvement in the labor market strengthened, economic activity rising moderately. (Neutral bias)
• Jobs gain solid in recent months. The unemployment rate stayed low. (Neutral bias)
• Growth in household spending expanding at moderate pace. (Neutral bias)
• Business fixed investment picked up in recent quarters.  (Neutral bias)
• Inflation measured on a 12-month basis has declined this year. Excluding energy and food, consumer prices running below 2 percent. The market-based measure of inflation compensation low. Survey-based inflation measure little changed on balance. (Mild dovish bias)
• Hurricane Harvey, Irma, and Maria disrupted many communities, inflicting severe hardship. Will affect the economy in the near term but not in the medium term. (Neutral bias)
• FOMC expects gradual policy adjustments and expects further strengthening in the labor market. Higher gasoline price over hurricane effects will boost inflation temporary. Inflation is expected to remain below 2 percent in the near term but stabilize near targeted 2 percent over the medium term. (Neutral bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and the rate to remain below longer-run levels. (Neutral bias)
• The Committee will begin implementing a balance sheet normalization program beginning October in a manner described in the June report.

Though the dollar has reacted positively on the release, the statement clearly indicates a more neutral stance from Fed. So, to gauge the upcoming Fed action, one would have to look at upcoming data.

Now, let’s take a look at the changes made in projection materials.]

• FOMC upgraded its growth forecast for 2017 from 2.2 percent to 2.4 percent. Upgraded its 2019 growth forecast from 1.9 percent to 2 percent. (Mild hawkish bias)
   
• FOMC downgraded its unemployment rate forecast for 2018 and 2019 from 4.2 percent to 4.1 percent. (Mild dovish bias)
   
• FOMC downgraded inflation forecast for 2018 from 2 percent to 1.9 percent. (Mild dovish bias)
   
• FOMC downgraded its core inflation forecast for 2017 from 1.7 percent to 1.5 percent and for 2018 from 2 percent to 1.9 percent. (Mild dovish bias)
   
• FOMC downgraded its Federal funds rate forecast for 2019 from 2.9 percent to 2.7 percent and for long-term from 3 percent to 2.8 percent. (Mild dovish bias)

The projection material shows, four dovish bias and one hawkish bias and we can conclude that this policy was in no way a hawkish one but more of a neutral or unchanged one. However, the market expectation was for a dovish policy announcement, which explains the dollar’s reaction, which rose sharply after the announcement.

The dollar index is currently trading at 92.4 against a basket of six currencies.