While we previously did a full preview of the key issues to be covered in today’s FOMC meeting, which include changes to the dot plot (1 net dot increase will push the number of rate hikes in 2018 from 3 to 4) as well as the Fed’s 2019 rate trajectory outlook, the change to the IOER rate, the discussion of the Neutral Rate, flipping to an “every meeting is live” mode, and how the Fed plans to deal with a generally overheating economy, the biggest interest – at least until Powell sits down at 2:30pm – is what the Fed statement will say.
To recap, with a number of Fed officials, notably Williams (voter) and Brainard (voter), arguing that forward guidance may need to be changed as the neutral rate approaches, the FOMC will likely review its language around ‘accommodative policy’. The line in the statement in focus will be that rates will remain “for some time, below the levels that are expected to prevail in the longer run.” It is therefore likely that this phrase will be taken out entirely.
Elsewhere, most Fed watchers expect the statement to retain an upbeat tone, with a constructive view on household spending, an acknowledgement of lower unemployment, and a hawkish rewording of the forward guidance. On the negative side, Goldman believes that with Italian sovereign spreads returning to levels last seen in the European debt crisis, the statement may include a subtle reference to heightened uncertainty abroad, echoing recent comments from Governor Brainard.
In terms of other key changes, look for the following:
- In response to upward pressure on the effective fed funds rate, n we expect a policy directive in the statement’s implementation note that will adjust the interest on excess reserves rate (IOER). Such a change (for example, “to a level 5 basis points below the top of the target range”) was strongly suggested by the May minutes.
- We do not expect a direct reference to recently enacted tariffs nor to the prospect of additional trade restrictions. We do, however, expect these issues to come up during the press conference.
- We think Fed governor nominees Richard Clarida and Michelle Bowman will not attend next week’s meeting. Given that the Senate Financial Services Committee vote is currently scheduled for Tuesday the 12th, the odds of scheduling and holding a floor vote to confirm them in time for the meeting are very low.
- We do not expect any dissents, matching the unanimity of the March tightening action. The December dissenters (Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans) are non-voters this year, and we expect that even the more dovish voters on the Committee will be persuaded to support a second hike in 2018
Putting it all together, here is the Goldman proposed redline of what the June (vs May) statement will look like:
Finally, in an interesting, if completely meeaningless exercise, Goldman conducted “probit regressions to quantify and analyze the growth and inflation assessments of the FOMC statements of the past decade.”
Focusing on the FOMC statements since 2007—an inflection point in the era of enhanced central bank communication—Goldman classified the growth and inflation language of each statement into six ordinal groupings, following a similar approach used in past research to analyze inflation pressures in the Beige Book. For example, the FOMC statement’s characterization of job growth during this period has run the gamut from “strong” and “solid” to “softened” and even “declined steeply.” This is charted below:
What does this mean for the June FOMC statement? As shown in the chart below, Goldman expects an upgrade to consumer spending (to “picked up in recent months”) and an adjustment to the job growth language (to “solid” from “strong on average”), but no changes to business investment or overall activity. With regard to the inflation assessment, the bank finds that the modestly lower pace at the June meeting (1.80% core PCE yoy vs. 1.88% at the May meeting) has not historically been enough to warrant a downgrade to the inflation rate (from “close to 2 percent”).
And yes, this is the kind of “analysis” you do if you are an economist with way too much computing power and time on yours hands.