There were some notable changes to the FOMC statement following the most recent meeting. The FOMC was more downbeat about economic activity, which is now "modest" rather than "moderate". This gels with the GDP data released this morning, which while better than expected was still a rather slow 1.7% ann.
The FOMC also made a stronger statement about the downside risks from low inflation. It also seems they no longer believe it is "transitory" but nevertheless should return to target over the medium term. This seems to have appeased FOMC member James Bullard, who dissented in June.
The Fed are likely conscious of saying too much with regards to the path for policy given the violent reaction in bond markets over the last couple of months. The Fed acknowledged that the sharp rise in mortgage rates could have a detrimental impact on the housing market and will want to avoid shifting mortgage rates higher again.
It is too early to say what impact the 100bps jump in mortgage rates has had on the housing market. In the very near term it will likely actually boost sales as those who are close to buying homes will be rushing in to secure loans before rates rise further.
Subsequently sales data could provide a bit of a head fake in terms of the resilience of the housing market, with a potential fade out in 3 months time giving a better guide to how resilient current housing demand is.
GDP growth for Q2 ended up being a bit better than forecasts based on the partial information to date, thanks to stronger inventories. But at 1.7%QSAAR, its hardly strong. To be sure, over the last 9 months has been a shade under 1% annualised.
Some of this weakness is expected to fade given now is the point of maximum pain from fiscal consolidation. Less of a drag from government cuts and tax hikes on consumers is expected to lift current growth rates closer to 3%, although it will be a struggle to get to Fed estimates of 2.3-2.6% for 2013 as a whole.
These GDP data also included some large revisions to historical data following a reevaluation of the GDP methodology by statisticians at the BEA. The level of GDP at the end of 1Q13 is now 3% higher than it was previously estimated to be, with growth in recent years revised higher.
This perhaps gels better with the labour force data which previous showed a break in relationships between employment and GDP growth.
But this really a distraction to the road ahead. The bottom line is growth is currently weak and it should not be taken for granted that things will get better once we pass the point of maximum pain from fiscal contraction. While the downside risks to growth may have diminished since last year, the Fed doesn't want to get in the way of things by unnecessarily tightening financial conditions.
