FOMC July Meeting – Three things we have learned

The two-day FOMC meeting concluded yesterday with the release of the monetary policy statement. With no press conference scheduled, the markets were widely expected to see no changes. As expected the US Federal Reserve kept the policy rate unchanged. The Fed also maintained that it would keep monetary policy accommodative.

The FOMC statement showed that the central bank would begin its balance sheet normalization “relatively soon.”

The US dollar was seen weakening after the FOMC statement sending its peers to fresh multi-year highs. The common currency, euro rose to a new three-year high earlier today, while the price of gold also posted a strong rebound, rising to a new one-month high.

The markets were prepared to hear some hawkish remarks from the Fed, however, the fact that central bank’s statement focused on the inflation concerns saw investors scale back the odds of further rate increases.

The central bank maintained that monetary policy would remain accommodative, consistent with the Fed’s previous message that the current rate hike cycle was a dovish one. Furthermore, with the interest rate staying at a neutral rate, the Fed is also not compelled to act.

Meanwhile, uncertainty remains as to who the next Federal Reserve President is going to be. Janet Yellen’s term ends in February 2018. So far, the other contender for the top job at the central bank is Gary Cohn.

Here are the three key points from the FOMC meeting yesterday.

Balance sheet normalization

As expected, the Fed noted that it would start the balance sheet normalization process soon. It is expected to start in September, although the central bank did not give any specifics on the timing. The Fed, however, noted that the process would begin provided that the economic activity in the US evolves.

The balance sheet normalization comes after the Fed began to purchase assets that included US Treasuries and Mortgage-Backed-Securities (MBS) as part of its quantitative easing program or QE.