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FOMC Lays the Foundation for a Rate Hike

Today’s FOMC meeting came with few surprises and without the fanfare that accompanied the June press conference (and associated economic projections.) As expected, no change was made to the Fed Funds rate, which remains at 1/4-1/2 percent.

Nonetheless, the statement contained three notable differences from the June release.

  • Increase in labor utilization. Unlike prior statements, today’s statement specifically noted that “payrolls and other labor market indicators point[ed] to some increase in labor utilization in recent months.” This is significant, as Chairwoman Yellen often has referred to the 19-part Labor Market Conditions Index in the past (which includes such variables as wages, the length of the average workweek, job openings and the Conference Board’s "help wanted" survey.) In a June speech, the Chairwoman had noted that “we are now close to eliminating the slack that has weighed on the labor market since the recession,” and today’s statement suggests broad agreement among Committee members that we are that much closer to full employment--and the point at which wage pressures may begin to emerge.
  • Diminished risks. Even with Brexit, the rise in political uncertainty and global security challenges, today’s statement cited that “near-term risks to the economic outlook have diminished.” Given the 36 times that the word “risk” was cited in the June minutes (including the comment that “some… participants were uncertain whether economic conditions would soon warrant an increase in the target range for the federal funds rate [with] several of them not[ing] downside risks to the outlook for growth in economic activity and for further improvement in labor market conditions,” today’s statement should reassure markets that the outlook is indeed improving. While “many participants saw the risks to their GDP growth and inflation forecasts as weighted to the downside” back in June, it appears that the country’s economic future over the next several quarters is less murky.
  • Back to pushing for a rate rise. While certainly not the consensus opinion, Esther George, President of the Federal Reserve Bank of Kansas City, once again voted to raise the target rate, repeating her call from March and April of this year. (The May payroll report perhaps was disappointing enough that she voted with her peers to hold the target rate steady in June.) Look for other voting members of the FOMC to indicate in interviews and speeches that they, too, are ready for a rate increase over the coming months.

 

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Heidi Learner

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