We expect the Fed to leave the target range for the federal funds rate unchanged at 0.250.50% at its July meeting as it debates to what degree the softening in employment growth owes to transitory factors and the extent to which risks from abroad have diminished.
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Given competing views on the committee, the statement will have to strike a careful balance between acknowledging that June employment rebounded sharply and accommodative financial conditions following the UK vote against the desire to see further evidence that labor market momentum will keep the economy in an above-potential growth path.
Too much caution would remove optionality for a September hike (our baseline) and likely preclude the possibility of two hikes before year-end. Participants will also be reluctant to place too much weight on the rebound in employment in June. Altogether, we see the July statement as striking a fairly neutral tone as the committee acknowledges improvement while awaiting the Q2 GDP report and July employment data.
Altogether, we expect no change in the target range for the federal funds rate in July and believe the statement will acknowledge the improvement in activity and labor markets during the intermeeting period. That said, we believe the statement will signal that the committee needs further evidence that labor markets and activity will support further progress toward the dual mandate before signaling to markets that another rate hike is forthcoming.
We do not expect this signal at next week’s July FOMC meeting and, instead, see Chair Yellen’s appearance at Jackson Hole on August 26 as a more likely time for a shift in tone. By this date, the committee will have Q2 GDP, July employment, and observed market reactions to anticipated easing by the BOJ (July) and BOE (August) in hand.