CFE Analysis | Fed

What will the Fed Do? June 2017 edition.

We’ve been reviewing those ‘5 things to watch for’ pieces that often precede FOMC meetings. Our conclusion is that even a Fed groupy is unlikely to find 5 notable things happening at any given FOMC. This is as it should be in an age of transparency.

We’re trying a different approach. We’ll try to distill Fed communication down to 5 important things that the FOMC has pretty much told us will happen. If one of these proves wrong, that would likely signal something noteworthy—either that or it might reflect a problem at the CFE Fedspeak distillery.

Here are 5 for this week’s meeting.

1. The federal funds rate: The FOMC will raise the target for the federal funds rate by 25 basis points. Given the rise in the stock market and fall in 10-year yields over recent months, financial conditions overall will arguably remain no less accommodative than they were before the recent sequence of increases.

2. Low inflation: The FOMC will convey its profound seriousness about getting inflation back to 2 percent. As we argued yesterday, the FOMC will also reaffirm that pursuing roughly the same policy they’ve been describing in previous plans remains appropriate to that task. But they’ll stand ready to react differently if needed.

3. Survey of Economic Projections (SEP): There will be changes in the SEP; these will be largely uninterpretable and should be ignored. As we’ve been arguing recently, there are more than the usual number of undocumented moving parts affecting the FOMC member forecasts right now, e.g., possibly changing fiscal policy and portfolio policy anticipations. And the usual SEP flaws remain. This document should not be viewed by those with impressionable or infirm minds.

4. Portfolio normalization: The FOMC will further clarify its portfolio normalization plans. The amount of detail released is likely to be governed not by policy considerations but by the extent to which the details have been nailed down and documented for public consumption. To the extent there is any substantial news, it will be about the likely start date (later this year) and technical details regarding smoothing the lumpiness of reinvestable funds. Within a broad range of macroeconomic and inflation outcomes, the planned path of normalization will not be altered as a tool of macroeconomic policy. The plan will be sufficiently gradual, and has been telegraphed sufficiently clearly in advance, that the systematic effects of the announcement should be minimal.

5. Market reaction: As with any unsurprising FOMC meeting, the sign of the market reaction is difficult to predict; the size of the reaction could well be many magnitudes greater than could reasonably be explained by the content of any news. As always, unless the moves prove large and durable enough to show through to employment and/or inflation, they will not materially affect the path of policy.

These are our attempt to take at face value the communication on behalf of the FOMC consensus—the FOMC statement, press conference, and other official statements of the Chair on behalf of the committee. These 5 points also reflect our attempt to ignore the often discordant and confusing transparency about the likely course of policy provided in other speeches, the SEP, the debate portions of the minutes, etc.

In our view, it would likely signal a newsworthy change in the direction of the FOMC if these don’t come to pass. But we have to admit that some impurities could have seeped into the CFE Fedspeak distillery. We’ll try to keep you posted.