The July meeting of the US Federal Reserve last week concluded as expected without it making any changes to its current policy stance.
The key Fed funds interest rate has been left at 0.375% for five consecutive meetings now.
With no press conference or updated economic projections, the markets focus was centred on the post-meeting statement.
The Fed’s description of the economy was upgraded, compared to the June statement, as it acknowledged the improvement in activity recently.
It noted the pick-up in employment growth, commenting that the labour market had strengthened and that job gains were strong in June, following weak growth in May.
It also described the economy as expanding at a moderate pace, with inflation continuing to run below its 2% target.
However, US GDP data for the second quarter of the year, released on Friday, were disappointing.
The economy grew by a modest 1.2% annualised in the quarter after growth of just 0.8% in the first quarter.
Admittedly, a fall in inventories knocked 1.2% off the growth rate, with final sales of GDP growing by a healthier 2.4%.
Consumer spending put in a very strong performance, growing by 4.2%, but both business and housing investment fell sharply.
In terms of the outlook, the Fed says that near-term risks to the economic outlook have diminished.
Low energy prices, a strong labour market, very low interest rates and a moderately expansionary fiscal policy all suggest that the economy should be able to pick up momentum.
Notwithstanding this, the Fed indicated that it will continue to closely monitor economic data, as well as developments in the global economy and financial markets.
The Fed repeated in its statement that it expects economic conditions will evolve in a manner that will warrant only gradual increases in interest rates.
Its most recent set of projections on the likely path of interest rates were released at its June meeting.
They showed that its median expectation for the Fed funds rate at end-2016 was 0.875%, implying two 25 basis point rate hikes over the second half of this year.
This is a much more aggressive trajectory for interest rates than the market is expecting.
Current futures pricing suggests the market puts the probability of a rate hike by end year at less than 50%, and is not fully pricing in a 25 basis point hike until the third quarter of next year.
Indeed, markets are pricing in just two rate increases by end-2018, taking the Fed funds rate to 0.875%.
By contrast, the Fed in its June forecast envisaged rates rising at a gradual but steady pace to 2.375% by end 2018.
This is quite a divergence in expectations.
Despite these Fed forecasts, there was no clear signal from the Fed in its July meeting statement that a rate hike is imminent even though it has become somewhat more upbeat on the economy.
There was no reference in the statement to the appropriateness of rate hikes, something which preceded its rate increase back in December 2015.
Furthermore, the Fed is still not back to characterising the risks to the economic outlook as being nearly balanced. Instead, it said the risks have diminished.
Meanwhile, only one Fed board member dissented from the decision to leave rates unchanged at the meeting, indicating that there is broad agreement on the need to maintain rates at their current level for now.
The continuing subdued GDP growth in quarter two will only add further to the Fed’s sense of caution.
Nonetheless, the Fed’s rate projections show that it has a clear bias towards tightening monetary policy.
This is not surprising given that it expects the economy to regain momentum, while the unemployment rate has dropped below 5%.
There are three Fed policy meetings over the remainder of the year.
These are scheduled for September, November and December.
Our view is that December is the most likely timing of the next rate hike.
By then the Fed will be able to assess if the recent improvement in labour market data is being sustained and whether the economy regained momentum in the second half of 2016.
However, it will be no surprise if the Fed keeps rates unchanged.
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