Wednesday, July 27, 2016

"Economists React to the Fed Statement: ‘Leans Less Dovish’"

From Real Time Economics:

Analysts split on whether a brighter view of the economy signals a potential September rate rise
The Federal Reserve held rates steady Wednesday but signaled a brighter outlook for the U.S. economy, suggesting another rate increase in the months ahead. Fed officials said near-term risks to the economy “have diminished” and pointed to better jobs numbers and “moderate” economic growth. Here are some early reactions to the news.

“The Fed was never going to provide a definitive steer on future rate decisions at this week’s [Fed] meeting, particularly not when Chair Janet Yellen is due to speak at the Jackson Hole symposium in late August. Nevertheless, the language added to today’s statement that ‘near-term risks to the economic outlook have diminished’ is a clear indication that a September rate hike might be coming.” —Paul Ashworth, Capital Economic

The policy statement embodied no new information about the timing of the next rate hike in the normalization process but leans less dovish than June by nature of the more optimistic assessment of the economy and a specific reference a diminution of near-term risks to the economy. The language in the first paragraph and the addition of one sentence on the risk to the outlook are more direct and less obtuse than has been typical of prior policy statements.  We suspect that this reflects an effort to improve communication.” —Ward McCarthy, Jefferies LLC

The July [Fed] statement went farther in the direction of hinting at the potential for future rate hikes than we anticipated. We had assumed that the capsule summary of economic conditions in the first paragraph would be updated to reflect the recent improvement in the economic data, which we thought would be a sufficient reminder that the Fed remained inclined to tighten further this year. However, the [Fed] also altered the second paragraph by inserting a line saying that ‘near-term risks to the economic outlook have diminished.’ While innocuous in itself, that is the kind of minor but deliberate wording change that the Fed has been using lately to signal a bias in its thinking one way or the other.” —Economists at Wrightson ICAP

“On balance, this was a less dovish statement than the June edition, and it points to diminished downside risks to the economy relative to June. However, the overall thrust of the message is that the Fed remains in a wait-and-see mode, though the ‘near term’ downside risks to growth are seen as diminished. As a result, we continue to expect the Fed to keep rates unchanged until mid-2017, though a further easing in risk factors and evidence of firming inflation could bring the timing of that move closer. However, there is nothing in this communiqué to suggest that the Fed is prepping the market for a September hike.” —Millan L. B. Mulraine, TD Securities USA