The Fed raised the target range for the federal funds rate by a quarter point yesterday to 1.0 − 1.25 percent, the fourth rate increase in the current business cycle and the second increase of 2017. The Fed also updated its Summary Economic Projections, known as the dot plots, though very little changed. The more important information revealed was that the Fed plans to begin shrinking its balance sheet this year. According to the Fed statement:
- The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.
- For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.
- For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.
- The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
The Fed continues to normalize policy in a slow and deliberate manner by raising interest rates away from its ultra-accommodative, zero-interest-rate policy, setting plans to reduce the size of the balance sheet, and balancing its dual mandates of full employment and price stability.
Data released by the Fed this morning show industrial output was unchanged in May, following a 1.1 percent jump in April. Over the past year, production has risen just 2.2 percent, a slow pace by historical standards. Among the components, mining output rose 1.6 percent and utilities output rose 0.4 percent. These gains were offset by a 0.4 percent decline in manufacturing output. A 1.0 percent decline in automotive products led the drop in manufacturing. Output in this area has been volatile recently, jumping 4.1 percent in April after a 3.6 percent drop in March. Over the past year, auto output is up 5.8 percent. Other decliners included appliances and furniture (−0.7 percent), miscellaneous goods (−0.6 percent), paper products (−0.6 percent), and food and tobacco (−0.2 percent). The largest gains came in chemical products (+1.5 percent), clothing (+0.8 percent), and home electronics (+0.6 percent).
In addition to the weak data on manufacturing for May, regional Fed bank surveys of manufacturers found mixed indicators. The Philadelphia Fed Manufacturing Business Outlook Survey had weaker readings in June compared to the May survey, but the overall levels of the indexes were well into positive territory. The Empire State Manufacturing Survey from the New York Fed had more-favorable results in June compared to May and, like the Philadelphia survey, broadly suggested a positive outlook for the manufacturing sector over the next few months.
Two other pieces of data this morning were weekly initial claims for unemployment insurance and the National Association of Home Builders’ sentiment index. Claims came in at 237,000 for the week, down from 245,000 in the prior week. The level of claims remains near all-time lows and suggests the labor market remains robust. The NAHB index of home builder sentiment fell back slightly in June to 67, following a reading of 69 in May. Each of the three main sub-indexes had similar two-point drops. However, the level of the overall index remains at a high level by historical measures.
While the data may be noisy from month to month, today’s data and yesterday’s actions by the Fed are consistent with a moderate-growth economy and provide no reason to expect a change in broad economic trends in the near future.