Weak Inflation in Focus at Fed's July Policy Meeting

By Harriet Torry Features Dow Jones Newswires

Federal Reserve officials are likely to hold monetary policy steady at the conclusion of their two-day meeting Wednesday.

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With no press conference scheduled after the meeting and no new economic forecasts to be released, any changes in their policy statement will be scrutinized for clues about the path for interest rates and when they might start shrinking the Fed's portfolio of Treasury and mortgage bonds. Here are four things to watch in the statement, which is scheduled for release at 2 p.m. EDT Wednesday.

Balance Sheet

A big policy question these days is when the central bank will begin to slowly shrink the mountain of Treasury and mortgage-backed securities it accumulated during and after the financial crisis. Officials have been saying they plan to start this year, but haven't specified when. They are likely to wait until September before announcing plans to begin the process. Watch the statement closely for any language tweaks that could signal when they intend to move.

Inflation

Price pressures have weakened lately, which could give the Fed reason to hold off on further interest-rate increases for a while. Inflation has undershot the Fed's 2% target for three consecutive months, according to the Fed's preferred gauge, the personal-consumption expenditures price index. Senior policy makers such as Fed governor Lael Brainard, Philadelphia Fed President Patrick Harker, Minneapolis Fed President Neel Kashkari and Dallas Fed President Robert Kaplan have voiced concern in recent weeks about pushing ahead with rate increases given the recent softening in inflation.

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Fed Chairwoman Janet Yellen said after the Fed's June policy meeting that recent lower inflation readings had been driven significantly by one-off drops in certain price categories, like wireless telephone services and prescription drugs. Yet she struck a stronger note of caution in congressional testimony earlier this month, saying "there may be more going on, and we're watching inflation very carefully in light of low readings." Watch the statement for any tweaks in officials' language about inflation.

Jobs, Jobs, Jobs

While weak inflation is prompting concern, the job market has been going gangbusters and unemployment was at a low 4.4% in June. That should offer some comfort to Fed officials who are counting on tight labor markets to eventually drive faster wage growth and inflation. The Fed's statement "will have to deal with the dichotomy between a resumption of moderate growth and continuing improvement in the labor market on one hand and ongoing softness in inflation on the other hand," Deutsche Bank analysts said in a note to clients last week.

Rate Increase? What Rate Increase?

One factor that the central bank is unlikely to address directly in its statement is the timing of its next rate increase. Officials raised their benchmark federal-funds rate last month to a range between 1% and 1.25%, and penciled in one more rate increase this year. Given officials' concerns about low inflation, they aren't likely to raise rates at their next few meetings. Federal-funds futures, used to wager on the central bank's interest-rate moves, place a 96.9% probability that the Fed leaves the fed-funds rate unchanged this month, a 91.6% probability it will keep the rate where it is now in September, and an 87.9% chance the benchmark rate still will be unchanged in November, according to CME Group.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

July 25, 2017 11:58 ET (15:58 GMT)