The FOMC made minimal changes to its post-meeting statement, and all the changes were in a positive direction. This suggests that the FOMC is content not only with the economic outlook and monetary policy outlook but also with its messaging and market expectations of further rate hikes. In particular, the FOMC did nothing to the statement that would suggest a lower likelihood of a September hike, which the markets were already expecting. The market has now priced a September rate hike as a near-certainty, and we agree with that assessment. We are fairly confident that there will be a December hike as well, but this is less certain.
All of the changes were made to the first paragraph. The pace of economic activity was upgraded to “strong,” from “solid.” Real GDP growth of 4.1% in Q2 certainly qualifies as strong. The statement did not mention the two-tenth rise in the unemployment rate in July, but rather noted that the unemployment rate “has stayed low.” This only reinforces that this recent uptick in the unemployment rate is of little concern to the Committee. It was noted that household spending, which includes both housing and consumer spending, has “grown strongly.” Previously, the statement read, “Recent data suggest that growth of household spending has picked up.” The new language is as definitive as it could be. The Q1 slowdown is behind us, and the economy is growing strongly. They saw no point in causing a stir by drawing attention to the soft housing data or the rise in the unemployment rate. As for inflation, it was noted that both headline and core inflation, on a 12-month basis, “remain near 2 percent.” Not a substantive change from the previous language (“have moved close to 2 percent”).
There was speculation in the market that the “for now” caveat from Powell’s prepared remarks for his testimony would be added to the August FOMC statement. We did not expect this to happen, and it did not happen. We regarded “for now” as underscoring the data-dependent nature of the FOMC’s rate-hike plans. This was already reflected in the June statement. Indeed, the entire fourth paragraph is devoted to making this point! So there was no need to add “for now” to the August statement. Plus, the statement already received an overhaul in June, and there was no press conference today to explain such a change.