Some initial thoughts on FOMC

The FOMC has not baulked at the recent low inflation outcomes and overall is sticking with its key projections and outlook for the next two years.  In her press conference, Yellen pointed to special factors including lower IT goods and pharmaceuticals driving recent low inflation outcomes, suggesting they may not persist, and cautioning that monthly data can be volatile.  She also described the labor market as tight.

The FOMC has naturally lowered it inflation forecasts for this year, but has maintained its forecasts for the next two years.  Core inflation forecast has been lowered this year from 1.9% to 1.7%, but retains the 2.0% forecast in 2018/2019 and in the long run.

The rate projections have changed little over the coming two years.  The median for this year continues to project one further hike this year (after the second hike this year today to 1.125%).  The median estimate remains for three hikes per year for the next two year to reach close to the perceived long-run normal level of 3%.

It has also had to lower its forecast for unemployment this year from 4.5% to 4.3% (last reported in May at 4.4%).  It has significantly lowered its unemployment rate forecast in the next two years from 4.5% to 4.2%.  It has also lowered its long run average median estimate from 4.7% to 4.6%.

The Fed announced a plan for reducing the size of its balance sheet, starting with $10bn per month ($6bn Treasuries and $4bn Agencies), rising quarterly by steps of $10bn until it reaches $50bn ($30bn Treasuries and $20bn Agencies), and continuing at this pace until it deems the level of reserves as normal.  The Fed said it expects this plan to begin this year.

The announced details of a plan on balance sheet reduction perhaps comes a bit ahead of expected, giving it a higher probability of being implemented sooner.