At the FOMC meeting which ended yesterday, the USA’s monetary authorities resolved to leave the federal funds target rate unchanged at 1.75%-2.00%. A tightening step at this point would have been a pretty major surprise. During the present rate-hiking cycle, after all, all decisions to tighten the monetary reins have so far been taken at FOMC meetings at which there has been a subsequent press conference. All that was scheduled for the August meeting was the publication of a monetary-policy statement. This communiqué has been marginally adjusted relative to the statement released at the June FOMC meeting: the Fed’s top echelons have factored in the handsome growth momentum generated over the second quarter and have accordingly shifted their growth assessment from “solid” to “strong,” without succumbing to growth euphoria in the process. The risks to the medium-term growth outlook appear to FOMC members to still be roughly balanced. The monetary custodians point out that inflation has climbed to above the Fed’s inflation target but are assuming that the twelve-month inflation rate is going to fluctuate around the bank’s symmetric objective over the medium-term horizon. The Fed’s new statement reflects a fundamental readiness on the part of the monetary custodians to continue on their moderate rate-hiking path.
Significant market reactions to the Fed’s (non-)decision have not materialised. Ten-year Treasury yields are continuing to oscillate around the 3 percent mark. The implied probability of a September tightening step, as gauged from fed funds futures rates, has increased to a slight extent to a current level of around 87 percent. In the coming weeks, market participants will probably be searching for pieces of evidence corroborating such rate-hike expectations.
In this connection, special importance will attach to the minutes of yesterday’s FOMC meeting, which are due to be published on 22nd August and will provide a deeper insight into the monetary-policy debate going on within the Fed. It could, for example, emerge from this transcript that the Fed’s top policymaking committee regards a further reduction of monetary stimulus as being justified “soon.” After all, this formulation in the minutes of the May meeting offered a clue about the key-rate hike which was then implemented in June. We assume that Fed representatives will move to raise the fed funds target range to 2.00%-2.25% on 26th September. And we think that a further rate hike will follow near the end of the year.