What Does the Fed Say?

Another storm in a teacup, no rate hike, more promises about raising rates down the line – after all the dot plot showed most members still think a rate hike is in the cards in 2015 – and another anticlimax for a rate decision.

In a way, I also think it behooves the U.S. economy, albeit to a limited degree, for the Federal Reserve to keep its cash rates at their current low levels. In the statement, the Fed kept promising that they will raise rates before inflation reaches the allusive 2% target. And based on the Fed’s own projections, the median core PCE will reach 2% only by 2018 – and no way the Fed keeps rates this low until then (right?!).

We need to remember that it’s not a matter of raising rates by 0.25% — this isn’t much of difference for bonds, equities or other financial instruments; it’s all about the change in policy, a shift in the Fed’s direction, and end of an era, a historic first rate hike in almost a decade, a new chapter in the Fed’s monetary policy, yada yada yada, you get the picture.

It’s also important to remember that the Fed likes to “surprise” the market when it comes up with new accommodating monetary policy (e.g. reducing rates, new QE program etc.) in order to change expectations (I know, we need to first believe rational expectations work in the real world like they do in economic classes) that will jump start the economy. This isn’t the case when the Fed goes the other way and raise rates. It must be careful not to rock the boat, and bring down the U.S. economic growth – “taper tantrum” enough said.

So where does it leave us?

At this point, the Fed shows its concerns over the global economic progress – subtext “China”. So don’t stay up late for the next FOMC meeting in October. As for December, it could still happen by then, but my guess, for now, it’s not likely. Therefore, we may not see a rate hike this year if the economic climate doesn’t show improvement (and for now, a 180 turnaround in China’s economy within the next three months doesn’t seem reasonable).

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