In its monetary policy statement this afternoon, the Federal Open Market Committee made no changes to interest rate policy. The Fed did acknowledge that the U.S. economy has recently improved, after a weak first quarter. Fed officials believe that U.S. economic activity will continue to expand at a moderate pace and labor market indicators will continue to improve. Inflation remains below the Fed’s “comfort zone” of near 2 percent. But they view energy prices as stabilizing, and that will allow inflation indicators to gradually re-normalize.
The economic projections of FOMC members released today show a downward adjustment to the rate of GDP growth for 2015, reflecting the weak historical data from Q1. In the March projections, Fed officials saw 2015Q4 year-to-year real GDP growth in the range of 2.3 to 2.7 percent. The June projections are revised down to 1.8 to 2.0 percent growth. The Comerica June U.S. forecast has 1.8 percent growth for the four quarters ending in 2015Q4.
The new “dot plot” is interesting. In the June dot plot of FOMC members’ expectations for the fed funds rate, we see a convergence of opinion about the expected path of the fed funds rate for 2015, compared with the March dot plot. In the just-released June dot plot all but two out of 17 dots are consistent with at least one interest rate increase this year, while no dots show an expectation of more than three rate hikes this year. From the June dot plot it is reasonable to expect the first increase in the fed funds rate in September to 25 basis points, and the second increase coming in December to 50 basis points.
The pacing of the “crawl” toward high interest rates remains very much data dependent. The Fed did not commit today to anything in their policy announcement. But, the new dot plot aligns with financial market expectations for a September fed funds rate increase.
In her post-announcement press conference, FOMC chair Yellen used the phrase “data-dependent” many times and emphasized a shallow trajectory for the expected path of the fed funds rate. On Greece, she said that the U.S. economy has only limited exposure to a possible default. She defended the Fed’s role regarding the insurance giant AIG.