FOMC Recap

The highly-anticipated Federal Open Market Committee meeting and statement has come and gone, and the Fed opted to keep rates unchanged at 0.25-0.50%, as widely expected. However, the specifics surrounding the statement could not have been more lacking in any real direction, as is usually the case. This lack of direction was readily reflected in the immediate market reaction, which mirrored the Fed’s characteristically hesitant and uncertain stance.

In keeping rates unchanged, the statement read: “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

The fact that the Fed acknowledged that the case for a rate hike has strengthened due to improvements in the labor market and economic growth gave the statement somewhat more of a hawkish tint. The statement went on to assert that “near-term risks to the economic outlook appear roughly balanced.” Also significantly more hawkish was the fact that there was a higher-than-usual degree of dissension among voting members, the most since 2014, with three dissenters voting to raise rates: Esther George, Loretta Mester, and Eric Rosengren.

The continued “data-dependent” uncertainty that typically permeates the Fed’s rhetoric, however, remained dominant. Generally, the primary concern helping to preclude a rate hike was low inflation, but the Fed also stated that it would like to see more improvements in the labor market. More dovish nuances were gleaned from the Fed’s newly-updated “dot-plot,” which is used to describe Fed officials’ outlook for future interest rate changes. The pace of future interest rate increases was, on balance, seen to be significantly slower than the collective forecasts that were provided in June.

In terms of the market reaction, this rather mixed message initially confused the market, as is often the case with the Fed. Both the US dollar and gold fluctuated sharply shortly after the statement and during Fed Chair Janet Yellen’s press conference. But when the dust settled, the dollar was lower and gold was higher. At the same time, US stocks rose modestly after the initial statement, but then climbed further during and after Yellen’s press conference. All of these market reactions indicate somewhat of a more dovish interpretation of Wednesday’s events.

Overall, the main takeaway from the September FOMC meeting was that the Fed still sees a rate hike likely occurring by the end of the year, but as always, this will be entirely dependent upon further economic data going forward. Furthermore, the future pace of tightening is likely to be even slower than previously expected. This brings up the possibility of a rate hike at the November FOMC meeting (November 2^nd). The likelihood of this occurring, however, should be rather low, as a major risk event in the US Presidential elections occurs only days after, and this would likely preclude any action in November by the characteristically cautious Fed.