U.S. Markets closed

Must-know: The lines of dissent in the July FOMC statement

Phalguni Soni

Must know: Takeaways from the Fed's July FOMC meeting (Part 1 of 7)

Lines of dissent in July FOMC statement

The U.S. Federal Reserve held its sixth Federal Open Market Committee (or FOMC) meeting of the year July 29–30. At its conclusion, on Wednesday, July 30, the Fed released the press statement for the meeting. In the statement, the Fed made the anticipated announcement that it would be tapering monthly asset purchases by $10 billion to $25 billion per month. The level of monthly purchases now stand at $15 billion in longer-term Treasuries (TLT) and $10 billion in agency-backed securities. Going by the current pace, the Fed is set to conclude its monthly bond-buying program (or QE3) by the end of the year.

Fed’s monetary policy stance

The Fed has maintained accommodative monetary policy conditions since the 2008 financial crisis and Great Recession. Keeping the Fed funds rate at essentially near zero levels since December, 2008, the Fed also embarked on three rounds of quantitative easing (or QE) in order to stimulate economic growth and reduce the unemployment rate, which had crossed 10% at the peak of the crisis.

At the end of the July FOMC, the Fed reiterated its dovish stance , that a “highly accommodative monetary policy stance” was warranted to ensure fulfilment of its twin mandate of ensuring full employment and price stability in the economy. The statement also said that it would keep the Fed funds rate low “for a considerable period” even after these goals were achieved, depending on economic conditions.

Charles Plosser dissents Fed’s guidance

Head of the Philadelphia Fed, noted hawk Dr. Charles Plosser , was the lone FOMC member voting against the monetary policy stance taken by the Fed. Dr. Plosser’s objected to the guidance provided on accommodative policy, saying that it was “time-dependent” and “didn’t reflect the considerable economic progress that has been made toward the Committee’s goals.”

Dissents by FOMC participants are relatively rare. As a result, market participants are eager to know the rationale behind the negative policy vote. You can read more about Dr. Plosser’s dissent and his views on monetary policy in Part 6 of this series.

Investor impact

Market participants closely watch the Fed’s actions and the views of Fed officials and policymakers because the monetary policy decisions at FOMC meetings impact both fixed income (BND) and stock (SPY) markets. The statements issued at the conclusion of the Fed’s FOMC meetings are particularly relevant. They describe the Fed’s monetary policy stance, including the all-important decisions on interest rates and the economic outlook.

Overseas markets also closely watch the monetary policy statements issued by the U.S. Federal Reserve. The policy statements often have repercussions on international fund flows, which affect stock and bond markets in both developed (EFA) and emerging markets (EEM).

In the May, 2013, taper tantrum following Ben Bernanke’s statement regarding tapering QE3, emerging markets experienced large outflows in the middle of 2013. In January, outflows from emerging and frontier markets continued as the Fed commenced tapering of monthly asset purchases.

In the next section, you can read a more detailed analysis of the monetary policy implications following the release of the July FOMC statement.

Continue to Part 2

Browse this series on Market Realist: