FOMC rate decision recap

After countless weeks and months of progressively intensifying suspense, the wait is finally over – the Fed’s decision on an interest rate hike in September has been revealed, and the outcome seems somewhat anti-climactic after so much vacillating anticipation.

The Federal Open Market Committee (FOMC) announced this afternoon that there will be no immediate interest rate hike, with one member dissenting – Richmond Fed President Jeffrey Lacker. Reasons cited for leaving rates unchanged centered on the low rate of inflation, financial market weakness, and uncertainty in the global economy, most notably China. There was not much in the statement that could be construed as hawkish, although improvements in employment and housing were acknowledged. Rather, the statement leaned rather heavily towards the dovish side, as it focused more on economic pressures that precluded the decision to hike.

The statement read, in part, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The FOMC also stated that it is “monitoring developments abroad.”

As for the future, the FOMC statement reiterated that there will be an initial rate hike when it sees “some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium-term.” However, while most of the FOMC members see an initial rate hike by the end of this year, four members now see an initial rate hike occurring in 2016 or later. In addition, the long-run outlook of the committee on the Fed Funds rate was also lowered.

While US equities initially dropped slightly on the news, they quickly recovered back up to positive for the day and began to rally further during the subsequent press conference, with the S&P 500 rising well above the 2000 level. As expected in light of unchanged interest rates, the US dollar dropped broadly against other major currencies, with the EUR/USD rising above the 1.1400 level. Gold was also given a substantial boost as it climbed above 1130 shortly after the announcement. Crude oil initially spiked but pared its gains soon after the Fed statement.

Overall, the highly-anticipated developments of the day did indeed move markets as expected. Now, however, what the markets may expect going forward will be much of the same that has been seen in the past several months – continued uncertainty and speculation regarding timing of an initial rate hike and the pace of subsequent tightening.