FED keeps the door open in July

Janet Yellen, of California, President Barack Obama's nominee to become Federal Reserve Board chair, testifies on Capitol Hill in Washington, Thursday Nov. 14, 2013, before the Senate Banking Committee hearing on her nomination to succeed Ben Bernanke. (AP Photo/Jacquelyn Martin)

The July FOMC statement was in line with our expectations heading into the meeting. The committee adjusted the opening paragraph of the statement to reflect the strength of the incoming data during the inter-meeting period but refrained from sending an overtly strong signal about its policy intentions during upcoming meetings. The committee now says that “economic activity has been expanding moderately in recent months” and dropped its reference to activity having changed little during the first quarter. The statement left the description of household spending unchanged and upgraded its assessment on the housing sector.

Regarding its assessment on inflation and labor market trends, the committee chose not to highlight the recent decline in energy prices. Instead, it merely removed the description from the June statement that energy prices have stabilized. The committee, however, did upgrade its view on labor markets, saying that job gains are “solid” and “a range of labor market indicators suggests underutilization of labor resources has diminished since early this year.” This, plus the minor alteration in paragraph three that the committee will raise rates when it has seen “some” further improvement in labor markets and is confident inflation will move back to 2% over time, suggests to us the committee remains on track to raise rates later this year. The characterization of labor markets and inflation suggests the committee does not see much slippage in its inflation outlook and is closer to its objective on labor markets.

We believe the data will support a September start to the hiking cycle and retain that as our baseline forecast. Should the data slip somewhat, or should international concerns rise to the fore, then the committee could choose caution and delay hikes.