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Economic Outlook - JULY 2016

Prior to the weak May employment report, there appeared to be a realistic possibility that the Fed would resume removing monetary policy accommodation and raise rates at the June FOMC meeting, although there was some reluctance to move prior to the U.K. referendum vote on leaving or remaining in the European Union. The poor jobs report, coupled with increasing uncertainty leading up to the Brexit vote, clearly took a June interest rate hike off the table. At that meeting the Committee lowered its expectations for near-term (2016) economic growth along with a longer term neutral fed funds rate.

Following on the heels of a strong rebound with the June employment report, economic releases indicated the U.S. economy remains resilient. In addition to the job market continuing to enjoy vigorous growth, consumer spending remains robust. The housing market is also enjoying a sturdy recovery. Along with improved economic data, financial conditions became more supportive as the global jitters associated with the Brexit vote and the attempted coup in Turkey have largely subsided. Nevertheless, Treasury yields are still well below levels observed earlier this year. One factor depressing Treasury yields has been the desire for safety in an increasingly volatile global economic environment. Another is that global investors have flocked to the U.S. markets as an alternative to sub-zero interest rates in Europe and Japan. 

 While the tone of economic data has improved, there is little to suggest the Fed is falling behind the curve yet. The inflation outlook is still relatively soft, and political and geo-political uncertainty remains high. The combination of better growth and contained inflation provides the Fed the flexibility to sound more confident in the economy while at the same time remaining patient. That was the general message of the policy statement issued at the conclusion of the July 26-27 FOMC meeting.

 

 

 

Financial conditions and economic data have gotten better since the June FOMC meeting, but getting better wasn’t good enough for policymakers. They refrained from taking further action on interest rate policy, but remained open for a rate hike later this year, possibly as early as September. The policy statement released at the conclusion of the two-day meeting reflected their comfort with the health of the labor market and the economy in general. Meanwhile their assessment of inflation remains unchanged. It remains below their 2.00 percent target rate and they remain confident it will gradually move toward their objective. The Committee remains concerned about the overall uncertainties facing the global economy and fear that the risks associated with it to the U.S. economy are tilted to the downside. They also fear that the risks of moving too quickly are asymmetric and more severe, thus they remain cautious and in watchful, waiting mode, letting the data dictate rate normalization. This may take a while. For the time being, our base case is for a delay in Fed action and only one rate hike this year, more than likely after the national elections.