The FOMC maintained the Fed funds target rate at 0.25%-0.50%, in line with consensus and market pricing, although a few analysts called for a rate hike. Looking at the rate decision, there were three dissenters (Mester, George and Rosengren) voting for an immediate hike and since three FOMC members have officially joined the no-hike-this-year camp according to the updated 'dots', we are dealing with a very divided FOMC. While the statement was quite hawkish, we think Fed chair Yellen was more dovish during her press conference .
Looking at the new 'dots', four members want to hike twice or more this year (based on today's decision, only three of them are voting members) while three members want to stay on hold for the rest of the year. 10 members expect one hike. The median 'dot' for next year was revised down from three hikes to two hikes, implying a more shallow rate path. The longer-run Fed funds rate was revised down once again to 2.875% from 3.00%.
Although the more hawkish statement puts pressure on our Fed call, we stick to our view that the Fed will not hike this year, especially as we think the Fed may be too optimistic about the current economic situation given the weakness in ISM and retail sales, but it is a close call . We have outlined our view in Presentation US: 10 reasons why we believe the Fed will not hike this year , 14 September (or see charts on page 3). However, incoming data will be analysed thoroughly in coming months and we may see markets react more to positive/negative data surprises . Also, in our view, one should not be fooled about the Fed's eagerness to hike as the Fed has communicated an upcoming rate hike the whole year. We still think most voting FOMC members have a dovish-to-neutral stance on monetary policy and when it comes right down to it they would rather postpone the second hike than hike prematurely. It is also worth noting that three voting hawks (George, Mester, Rosengren) all lose their voting rights next year .
Markets have priced a 60% probability of a hike by year-end. Market reaction was muted .
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