Dots Point to December Hike

As we anticipated, today’s key news was contained in the FOMC’s updated projections for the fund’s rate and inflation. The FOMC lowered its projection for core PCE inflation this year and next—just as we had expected. But despite that downward revision, the dots showed a very solid consensus remains for one more fund’s rate hike this year. Furthermore, the FOMC projected that core inflation would essentially be at their objective next year (1.9%, down only slightly from 2% in June). That suggests a greater likelihood of a  December hike. As a consequence, we are restoring our call for a rate hike in December. There was no news in the FOMC’s postmeeting statement. 

As we anticipated, the median 2017 dot continued to imply a December hike.  

• The distribution of 2017 dots shifted down, but solely as a result of participants who, in June,  wanted to see four hikes in total now projecting only one additional hike. We had expected a few participants who had been at three hikes this year to have lowered their expectations to only two hikes—that did not transpire. 

• The median 2018 dot continued to imply three hikes. But the median 2019 dot now implies only two hikes, one fewer than in the June projections. The 2020 dot (published for the first time today)  implies one hike that year. 

• The median longer-run dot shifted down 25 basis points, to 2.75%. Six participants still see the longer-run at 3% or higher. 

The FOMC’s core inflation projection for 2018, down a tenth to 1.9%, was undoubtedly the most important part of the macro projections. 

• While core inflation was revised down next year, the takeaway is that it is still projected to be essentially at its objective next year. This suggests that the FOMC didn’t revise down materially its assessment of underlying inflation since the June projections were submitted, despite subsequent soft inflation readings. 

• Projected core PCE inflation was revised down to 1.5% this year. Given the data available, through  July, monthly readings for August through December corresponding to annualized core PCE inflation of 1.8% would be consistent with that projection for 2017. 

• In 2019 and 2020, both core and headline PCE inflation are projected to be at 2.0%. So still no overshoot (though the cluster of dots at the high end of the distribution for 2020 suggests that several members anticipate inflation, and funds rate, overshoot). The unemployment rate projections shifted down a tenth in 2018 and 2019. 

• As in June, the FOMC projects that the unemployment rate will average 4.3% in the fourth quarter  of this year. 

• However, rather than flattening out at 4.2% thereafter, as in the June projections, the unemployment rate is now projected to bottom out at 4.1% in 2018 and 2019 before ticking up to  4.2% in 2020. The 2020 increase is a bit difficult to square with the observation that the FOMC  does not anticipate that the growth of output will fall below the pace of its potential at any point in the projection. 

• The longer-run unemployment rate projection remained at 4.6%; we’d thought this might be lowered a tenth in light of the ongoing subdued pace of labor compensation. 

The growth projections weren’t meaningfully changed: The FOMC still projects a gradual decline in real GDP  growth until it reaches its longer-run projected rate (1.8%), in 2020. 

• Growth this year was revised up to 2.4%, reflecting the stronger data as well as greater apparent  momentum. 

• A tenth greater projected growth in 2019 is not meaningful. 

The broad contours of the changes to the FOMC statement came in much as we expected, and have no implications for our outlook for monetary policy. 

• The statement noted that the impact of the hurricanes on the economic outlook would be “unlikely  to materially alter” the outlook over the “medium term.”  

• The statement also acknowledged likely temporary upward pressure on headline inflation coming from a spike in gasoline prices. Otherwise, the characterization of inflation developments and the inflation outlook remained the same and suggested no more concern about inflation than previously. 

• The statement was more upbeat on business fixed investment (“has picked up,” an improvement from “continued to expand”). 

• As widely telegraphed, the balance sheet normalization program will begin in October.  

                        *LH Meyer forecast published September 12, 2017. 

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