FOMC to leave fed funds rate target unchanged - Nomura

Analysts at Nomura explained that they expect the FOMC to leave the federal funds rate target unchanged at 0.25–0.50% after its two-day policy meeting.

Key Quotes:

"Moreover, we do not expect the FOMC to make significant changes to its policy statement. Developments since the last FOMC meeting should pull the FOMC in different directions. On one hand, recent economic data—notably strong payroll employment growth, robust consumer spending, and a solid increase in industrial production in June—confirm that growth picked up in the second quarter after slow start to the year.

"We believe the Committee will likely revise its economic assessment to reflect this new data. Given the strong rebound in nonfarm payrolls and solid consumer spending data in June, we expect the first paragraph of the post-FOMC statement to mention continued expansion in economic activity and improvement in the labor market. But we expect the Committee to downgrade (or drop) its characterization that the drag from net exports has lessened.

Also, financial markets have recovered after the initial shock of the Brexit vote and the associated policy responses. Immediately following the vote, equity markets sold off sharply, corporate spreads widened and treasury yields plummeted—primarily due to a decline in term premia (see Figure 1). Since then, however, with the exception of the broad trade-weighted exchange rate, financial conditions have recovered. On balance, financial conditions are probably more supportive for growth now than they were before the vote.

All that said, the coming realignment of economic relations in Europe and the US election remain significant sources of uncertainty for the economic outlook. At this point we simply do not know how the US economy will respond to Brexit. A few business survey results covering the period after the referendum have been mixed.

The July Empire State and Philly Fed manufacturing report showed business sentiment declined. But the details of the Philly Fed report also showed that business activity improved over the month. Most of the data we have received in the past several weeks still cover the period before the Brexit vote.

Consequently, it will take at least another month or two of data to assess even the initial reaction of the US economy to the coming changes in Europe. Of course it will be many months, possibly years, before we know how economic relations in Europe will evolve"