Analysts at Nomura noted that the FOMC raised its targets for short-term interest rates, as widely expected.
“The FOMC’s interest rate forecasts were little changed.
In reaction to the steady declines in the unemployment rate to 4.3% in May, the FOMC notably lowered its unemployment forecasts for 2017-2019. However, the FOMC only changed its longer-run unemployment forecast to 4.6% (from 4.7% in March).
Apparently, the FOMC sees a tighter labor market largely offsetting the recent weakness in inflation (Yellen did state that “…it’s important not to overreact to a few readings and data on inflation can be noisy”).
The FOMC’s inflation forecast was lowered for 2017 (reflecting incoming data), but the medians were unchanged for 2018, 2019, and the longer run.
The other important innovation was that the FOMC released a new “Addendum to the Policy Normalization Principles and Plans.” The FOMC laid out specific caps for the monthly maximum roll-off for Treasury and Agency MBS securities. The caps for Treasuries will start at $6bn and increase by $6bn every three months until the cap reaches $30bn. For MBS securities, the cap will start at $4bn, and rise by $4bn every three months until it reaches a maximum of $20bn.
Neither the addendum nor Chair Yellen in her comments mentioned a specific target for what the longer-run normal level of the balance sheet will be. She said that the Committee expects to “learn more about the underlying demand for reserves during the process of balance sheet normalization.”
Thus, uncertainty or disagreement over the appropriate long run framework for monetary policy isn’t a reason to delay balance sheet normalization. The FOMC’s balance sheet guidance was more specific than we had expected. It suggests that the FOMC is closer to taking the decision to let the balance sheet roll-off than we expected.
Consequently, we now expect the FOMC to announce a decision to begin balance sheet roll off at its meeting in September. Previously, we had expected such an announcement at their meeting in December.
We now expect the FOMC’s next interest rate increase to be delayed until its meeting in December, with just two additional hikes in March and September in 2018.”