Policy Tightening Likely Ahead For September

Economic Pulse
June 17, 2015
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Today’s statement from the Federal Open Market Committee (FOMC) struck a more positive tone than April’s release, and clearly highlighted an improvement in macro conditions. Whereas economic activity was “little changed” during the first quarter, information received since April suggested that activity has been “expanding moderately.” Job gains were described as having “picked up,” while household spending growth was “moderate”—both upgraded characterizations.

While Committee Chair Yellen was clear that the Fed doesn’t expect to follow a “mechanical” approach to raising rates, the statement did acknowledge that energy prices “appear to have stabilized,” which would likely limit further downward pressure on inflation. Moreover, in the Q&A session that accompanied the release of the FOMC’s latest projections (Chart 1), Chair Yellen acknowledged “tentative signs of stronger wage growth” even as she highlighted the fact that core inflation is still running below the Committee’s objective.

Chart 1. Economic Projections of Federal Reserve Board Members and Presidents, June 2015

Table: Economic Growth by District, June 2015

Source: Federal Reserve SpaceBold = change from prior report.

Given the economy’s weak start in Q1, the Fed’s outlook for 2015 GDP growth was revised lower versus March’s forecast. However, economic projections for growth and unemployment were largely unchanged for 2016 and 2017. Notably, the median forecast for Fed tightening in 2015 remained at 0.625%, suggesting that the policy rate will be increased by roughly 50 bps this year, even if the course of tightening is somewhat slower in the years ahead. Look for a rate hike in September, barring a decline in consumption and a reversal in labor market conditions over the summer.