FOMC left the policy rate unchanged at 2.25-2.50% but with one dissent. St Louis Fed President James Bullard voted against the decision as he proposed to cut the rate by -25 bps. The dot plot projections show that more members are in favor of lowering interest rates. The policy on balance sheet reduction has no change.

Policymakers acknowledged softer inflation outlook ahead. Yet, they remained generally confident about the economic outlook. As such, they revised lower unemployment rate in coming few years and maintained the GDP growth forecasts largest unchanged.

Despite market speculations that a rate cut will come in as soon as July, the Fed expects no change in the policy until 2020. Apparently, the market is not convinced that the Fed could keep its powder dry throughout the year. According to the 30-day Fed funds futures, the market has ha fully priced in a rate cut in July, and over 90% chance that there will be totally 2 rate cuts by end-2019.

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Economic Assessment

On the economic assessment, the Fed judged that the economic activity rose at a “moderate” rate, compared with “solid” rate noted in May. It indicated that core inflation were “are running below 2%” while “market-based measures of inflation compensation have declined”. In May, it noted that “market-based measures of inflation compensation have remained low”. Although the members retained the view that inflation could reach the +2% target, they acknowledged that “uncertainties” have “increased.

In the latest economic projections, PCE inflation is expected to decelerated further to +1.5% this year (March: +1.8%), before recovering to +1.9% in 2020 (March: +2%) and 2% in 2021. Core inflation forecasts are also revised lower to +1.8% for 2019 and +1.9% for 2020. The staff projected +2% during these periods in March.

The job market would remain robust. The unemployment rate is expected to dropped to 3.6% this year, before climbing higher to 3.7% and 3.8% in 2020 and 2021 respectively. The unemployment rate is expected to go back to 4.2% in the longer run. Projections throughout the forecasting horizon came in lower than those in March. On the overall economy, GDP growth for next is taken slightly higher to +2%, from March’s +1.9%.

Forward Guidance

As we had expected, the Fed removed the word “patient” in future monetary policy. Instead, the members pledged to “closely monitor the implications of incoming information” and “act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric +2% objective”. As we mentioned in our preview, this aims at preparing the market for rate cuts.

Median Dot Plot

Despite intensified speculations that a rate cut would arrive later this year (July the soonest), the median dot plot shows no change in the policy rate this year. Yet, it is revealed that 8 members favored rate cut. A rate cut is likely in 2020 as the median dot plot shows that the policy rate might lower to 2.1%, compared with 2.6% projected in March. There has been a narrow majority (9 members) favoring rate cut. For 2021, the median dot plot projects that policy rate would increase to 2.4%, compared with 2.6% projected in March.

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