Perhaps the biggest surprise in the Fed’s statement was that it made no mention at all of an intention to taper later in the year, instead sticking with previous wording that ‘the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes’.
There were very few changes at all to the FOMC statement, although some very slight changes in terminology did put a slightly dovish slant on proceedings, with the statement saying that information received since the last meeting ‘suggests that economic activity expanded at a modest pace during the first half of the year.’ The emphasis here is on modest. In the June statement, the word used was moderate. Modest is lower ranking than moderate in the Fed’s lexicon.
The Fed notes that unemployment remains elevated despite improvement in the labour market, which is pretty much the same thing they said in June. The language with regard to inflation was slightly amended, perhaps as a nod to committee-member James Bullard’s stated concerns over low inflation.
In the June statement, the FOMC had said that they anticipate ‘inflation over the medium term likely will run at or below its 2 % objective.’ The July statement strengthened the language, saying ‘the Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.’ Given this increased emphasis on inflation, Friday’s PCE price index for June looks to be of heightened importance.
The Fed has long stressed that its decision to taper will be based on incoming data, and this latest statement very much stands by that, but the failure to paint a clear roadmap for tapering at the September meeting makes me think that scenario now looks less likely, especially given the way unemployment has remained stubbornly high and inflation has remained stubbornly low.