The FOMC minutes from the June meeting did not see anything new, as expected, as Yellen was pretty evident during the press conference following the policy announcement. The timing of the balance sheet run-off was the most interest part of the minutes as many preferred to announce a start to the process in a couple of months if the economy evolves as expected, noted Danske Bank. ‘Some’ intent to wait until later in the year.
In all, it underpins the view that the U.S. Fed recognises that the size of the balance sheet should be higher now than pre-crisis, as demand for central bank reserves has increased because of rising financial regulation, the risk stays that the Fed is very optimistic about how much it could contract the balance sheet. However, it is still unknown what level of the balance sheet the Fed aims at.
On inflation front, the minutes stated low inflation is likely ‘transitory’, consistent with what Fed Chair Yellen stated at the press conference. Fed continues to have faith in the Phillips curve that says that the tighter labor market should push up wage growth eventually. The issue is that tightness of the labor market is not the only factor determining wage growth, as second-round effects from the several years with inflation below 2 percent have hit wage growth.
“We expect the Fed to hike one more time this year in December due to the focus on the unemployment rate and easy financial conditions”, said Danske Bank.
However, four FOMC members have hinted no additional hikes in 2017 in the updated projections. The Fed is expected to make an announcement on the balance sheet in September.
