Federal Reserve policy statements don’t normally make memorable reading.
But this month’s report contains a single sentence that Wall Street appears to be hanging on.
On Wednesday, the Fed said that it was keeping the short-term interest rate it controls unchanged at 0.25%. July was the seventh month in a row that the Fed decided to leave rates where they were, after raising them for the first time in years in December. But not everything was unchanged.
Each month the Fed releases a policy statement that is roughly 500 words. Most of the words in July’s statement were basically unchanged from the month before. But there was one additional nine word sentence that wasn’t contained in the statement in June, and that people on Wall Street appear to be focused on:
Near-term risks to the economic outlook have diminished.
On it’s own the sentence doesn’t offer that much hope. Few think the U.S.’s economy looks risky right now. The concern is that it has been sluggish, and most people been wondering when growth would pick up, not looking to predict when it will fall off a cliff.
But the sentence is important because it hasn’t been in the Fed statement for months. And the Fed’s statement is all about signaling, rather than an explicit description of its plans. Based on that a number of market strategists are now saying the addition of the diminished risks statement could mean that the Fed will raise rates as soon as September. Before Wednesday, the market seemed to be betting that the Fed wouldn’t raise rates until December, or next year.
Rick Rieder, Blackrock’s chief investment officer of its fixed income unit, says the appearance of the diminished sentence says something. He believes it likely means the Fed is less worried that the slowing global economy and a weaker China is particular is likely to drag the U.S. into a recession. “The Fed. . .continues to recognize that U.S. economic data remains stronger than that seen in much of the rest of the world,” says Rieder.
But don’t bet on a September rate increase just yet. The jobs market, even after the rebound in June, is still creating 28% fewer jobs this year a month on average than a year ago. There’s Brexit, which is causing the value of the pound and the euro drop, likely to hurt U.S. exports. A rate increase would cause the dollar to rise further. On top of all that, the November election is just a few short weeks after the September meeting, which makes this an awkward time for the Fed to move, as it may create economic volatility that could affect the outcome.
Vincent Reinhart, the chief economist at Standish and former top official at the Fed, predicts Fed Chair Janet Yellen and Co. are only like to raise rates once in 2016, and if that’s the case, even if they wait until after the election, there are two meetings—November and December—that the Fed will have in order raise rates. And by then it’s likely that the economy will have actually gone from a state that no longer looks diminished, to something that resembles healthy.
