The Fed Keeps Policy Unchanged – Shocker!

The FOMC concluded its meeting and released another statement that didn’t offer much new information about the timing of the first historic rate hike. I know what you think – shocker!

Well to be fair, there were modest changes to the wording of the statement as you can see in the link herein.  There were some more encouraging words about the progress of the U.S. labor market, but the Fed’s inflation target remains out of reach as it’s still well below 2% and could remain there for a while. And if the Fed were to raise rates, this target could be even harder to reach especially in the current depressed energy price environment.

At this point if the Fed were to keep its statements nearly unchanged as they offer little more meat to chew on, perhaps it’s best to disregard these statement all together. But perhaps I have spoken too soon. At first glance it seems the market didn’t have a big of reaction: The USD mostly went up against major currencies; gold modestly declined.

Nonetheless, the market did consider this statement as if the Fed took a September hike off the table: The implied probabilities in the bonds market didn’t change much: The probability for a September a rate hike went to zero from 19% only a few days ago. For December the chances actually went up from 55% to 64%. So it seems the market still expects a rate hike this year, albeit it will be at the very end of the year.

Keep in mind, we are still talking of a mini rate hike of a 0.25pp this year either in September or December. It could be a while before the Fed makes another move as it will try not to rock the boat – perhaps that should be the Fed’s new/old moto – and keep the inflation target within reach ( even though at this point it seems an unfeasible goal). The impaction of this rate hike will mostly be on market expectations, which are mostly already incorporated in the prices of assets.

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