As widely expected, the FOMC took the leap and hiked interest rates by 25 basis points in their June meeting. Amidst myriad uncertainties, Fed Chair Janet Yellen kept a steady, balanced tone in the press conference following the meeting. Here are the key takeaways:
The balance sheet
When asked about the balance sheet, Yellen maintained that reducing it would be a non-event for financial markets. It will be like “watching paint dry” according to the Fed Chair. She expects the balance sheet reduction plan “to run quietly in the background” with little to no revisions once it begins, thus giving it the essential air of predictability and passive progress that would keep it from disrupting Wall Street.
Chair Yellen also emphasized that as stated in the meeting minutes, there has been no definite decision on timing, although we expect this to materialize before year-end.
Inflation is influenced by a number of different factors, but we have yet to see much evidence of upward pressure on prices. Recognizing this, the Committee seems to have scaled back their hopes of seeing this pressure sooner rather than later. “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.” They also explicitly noted that they are “monitoring inflation developments closely,” which Chair Yellen also mentioned in the Q&A session.
The dot plot
The dot plot maps FOMC member’s expectations of the path of interest rates, and is seen by many as a fairly reliable indicator of future policy. The June dot plot was largely unchanged, pointing to a majority of members leaning towards a third rate rise this year even as two members abstaining from including their long-term projections.
Will we hike again?
Highly uncertain. This meeting has left us with more questions than answers. With 4 members indicating their view that the Fed is done hiking rates this year, the overall dot plot still indicates that the majority of policymakers anticipate another hike this year.
We believe that the Fed’s action will hinge on upcoming inflation and employment data as they take an “appropriate management of risks.”