There were few surprises in today’s Federal Open Market Committee (FOMC) decision and statement to hold the fed funds target rate at between 0.50 and 0.75%. The decision was unanimous with no dissents.
We continue to expect the next rate hike from the FOMC in June 2017 and three quarter-point rate hikes from the Fed in 2017.
The Fed noted that the labor market continued to strengthen, and economic activity continued to expand at a moderate pace. The statement characterized job gains as solid, and household spending has continued to rise moderately while business fixed investment has remained soft. The FOMC added a sentence that measures of consumer and business sentiment had improved of late.
On inflation, the Fed noted that inflation increased in recent quarters but is still below the committee’s 2% long-run objective. It also noted and that market-based measures of inflation compensation remain low and survey-based measures of long-term inflation expectations are “little changed.”
In short, it appears that the U.S. economy is performing pretty close to plan right now, and the FOMC saw little reason to either accelerate the pace of rate hikes or moderate the pace in 2017. The FOMC Median dot-plot, updated at the December meeting, showed 3 quarter-point rate hikes this year. The fed funds futures market continues to expect only 2 quarter-point rate hikes by year-end. Today’s statement will do little to change interest-rate hike expectations for this year.
Shrinking the balance sheet?
Some analysts had been looking for more guidance on timing of when the FOMC will start to unwind its $4.5 trillion balance sheet. Today’s statement added little insight on this question, as the Fed will continue to reinvest principal payments from its holdings of agency debt and rollover maturing Treasury securities at auction; and it anticipates continuing to do so until normalization of the level of the federal funds rate is well underway. We take that to mean the shrinkage of the Fed balance sheet is likely a year or more away at this point.
Market reaction to the FOMC decision and statement has been muted so far. U.S. equities are trading just above the flat line. The 10-Year Treasury yield is up 2 basis points from yesterday’s level to 2.47% (but fallen since this morning), while the U.S. dollar strength has softened a bit since the statement release.
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