September FOMC

The September FOMC was slightly more dovish relative to the consensus “hawkish hold.”  The FOMC statement stated that “the Committee judges that the case for an increase in the federal funds rate has strengthened,” a line taken from Chair Yellen’s Jackson Hole speech that largely met market expectations.  However, implications of uncertainty in “to wait for further evidence of continued progress toward its objectives” was perceived as less hawkish.

In contrast, Boston Fed President Rosengren surprised market participants by joining President George and Mester in dissent.  Even though his concerns over CRE valuation are well-known, few expected the once dovish policymaker to join forces with policy hawks to push for immediate resumption of policy normalization.

The SEP median “dots” declined further to converge toward market expectations of a shallow rate path:

• Median funds rate estimate for end of 2017 at 1.1% vs. 1.6% in June
• Median funds rate estimate for end of 2018 at 1.9% vs. 2.4% in June
• Median funds rate estimate for end of 2019 at 2.6%
• Longer run estimate at 2.9% vs. 3.0% in June

Chair Yellen’s remarks at the FOMC press conference were cautiously optimistic, with elements similar to views previously expressed by Governor Brainard:

• The economy “has a little more room to run than might have been previously thought,” and the increase in labor force participation rate suggest scope for further improvement in the labor market: “we are seeing evidence that people are being drawn into the labor market in large numbers,” and “that is healthy to continue”
• Current policy stance is “only modestly accommodative” under low neutral nominal federal funds rate
• Efficacy of policy tools remain asymmetrical with rates near zero lower bound
• There is “little risk” of the Fed falling behind the curve

Taken as a whole, the September FOMC signaled likelihood of a rate hike later this year, and the Committee’s focus on further scope of economic improvements and low neutral rate signaled some policymakers’ willingness to let the economy run hot (likely Governor Brainard, Tarullo and Powell) amid persisting policy divergence.