Fed remains data-dependent

As widely expected, the Fed did not offer any code word for an imminent rate hike. However, the Fed did indicate that we are getting closer to the first rate hike, as they added 'some' to the further improvement in the labor market that the Committee wants to see before lift-off. However, we already knew that labor market indicators had improved and that the first hike is closer than it was a month ago.  

The Fed dropped 'somewhat' from the assessment that underutilization of labor resources diminished, and replaced it by 'since early this year'. The fall in the unemployment rate was also acknowledged in the phrase 'the labor market continued to improve, with solid job gains and declining unemployment.' In the June statement 'the pace of job gains picked up while the unemployment rate remained steady.'  

The Fed was also slightly more positive about the housing market, replacing 'some' improvement by 'additional' improvement. The FOMC repeated that economic activity has been expanding moderately, but replaced 'after having changed little during the first quarter' by 'in recent months.' This also shows a little more confidence in the post-winter reacceleration of the economy. However, it remains unclear whether the continued improvements in the labor market, the housing market, and economic activity in general will be sufficient to hike at the next meeting in September.

Market-based measures of inflation have declined substantially, it did remove the premature claim that 'energy prices appear to have stabilized.' In other words, while the FOMC has become more confident of the economic recovery, it has become less confident about the inflation outlook. The Committee still sees the risks to the outlook for economic activity and the labor market as 'nearly' balanced, and did not upgrade this to risks being 'roughly equal' as it did in 2004 before the start of the previous hiking cycle. This means that the FOMC is still concerned about the downside risks to its current outlook for the economy.

"While a September rate hike remains a distinct possibility, we still have our doubts and we continue to attach a higher probability to a December lift-off. We think that the FOMC, which has a large dovish majority, would like to see more evidence of strength in the economy and 'reasonable confidence' that inflation is moving back to target than the data are likely to provide before the September meeting", notes Rabobank.