FOMC Update – July 26, 2017

In a widely expected move, the FOMC left rates unchanged, citing relatively low levels of
inflation and even noting that ex-food and energy, prices have actually declined on a 12-
month basis. Household spending and business investment were also highlighted as a
bright spot, as was the labor market. The Committee also noted that the long-awaited
normalization of the balance sheet will begin “soon,” leaving plenty of flexibility to that

Rates and Market:

  • Fed Funds Target: unchanged at 1 to 1.25%
  • Policy Bias: remains accommodative
  • Market Reaction: rates fell 2-3bp immediately following the announcement

The FOMC announced the following actions and analysis:

  • 9 – 0 vote
  • Economic expansion expected to continue at a moderate pace
  • Inflation is below the 2% objective and expected to remain so for the near term
  • Risks to economic outlook are roughly balanced
  • Balance sheet normalization to begin relatively soon

The Statement:

Information received since the Federal Open Market Committee met in June indicates
that the labor market has continued to strengthen and that economic activity has been
rising moderately so far this year. Job gains have been solid, on average, since the
beginning of the year, and the unemployment rate has declined. Household spending
and business fixed investment have continued to expand. On a 12-month basis, overall
inflation and the measure excluding food and energy prices have declined and are
running below 2 percent. Market-based measures of inflation compensation remain low;
survey-based measures of longer-term inflation expectations are little changed, on

Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee continues to expect that, with gradual
adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, and labor market conditions will strengthen somewhat further. 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. Near
term risks to the economic outlook appear roughly balanced, but the Committee is
monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee
decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The
stance of monetary policy remains accommodative, thereby supporting some further
strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to its objectives of maximum employment and 2 percent inflation. This
assessment will take into account a wide range of information, including measures of
labor market conditions, indicators of inflation pressures and inflation expectations, and
readings on financial and international developments. The Committee will carefully
monitor actual and expected inflation developments relative to its symmetric inflation
goal. The Committee expects that economic conditions will evolve in a manner that will
warrant gradual increases in the federal funds rate; the federal funds rate is likely to
remain, for some time, below levels that are expected to prevail in the longer run.
However, the actual path of the federal funds rate will depend on the economic outlook
as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting
principal payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over maturing Treasury
securities at auction. The Committee expects to begin implementing its balance sheet
normalization program relatively soon, provided that the economy evolves broadly as
anticipated; this program is described in the June 2017 Addendum to the Committee’s
Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C.
Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick
Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

By Steve Brown, President & CEO of PCBB