FOMC: Holds rates steady but signals near term tightening - ANZ

Research Team at ANZ, notes that the FOMC left interest rates unchanged as expected, but signalled that one increase in the Fed funds rate was likely by December while three voters dissented on the decision to hold rates.

Key Quotes

“Yellen emphasised that assessment in her press conference saying that the decision to leave rates on hold in September “did not reflect a lack of confidence in the economy”. She said that the decision to hold off raising rates reflected the fact that labour market slack is being absorbed at a slower pace than in previous years, inflation is still below trend and that the Fed runs little risk of falling behind the curve given that monetary policy is only “moderately accommodative”. The asymmetry of policy when rates are close to zero also played a role in the decision. In addition, whilst growth is recovering, rates of utilisation are not indicative of an overheating economy and therefore the economy can run a little faster.

The FOMC’s statement said that the “near term risks to the economic outlook appear roughly balanced”.

Whilst the FOMC clearly sees scope for a rate rise later this year, the dot points for the end of next year were cut to 1.1% (from 1.6%). This indicates only 2 hikes in 2017, down from the 3 flagged in June. The FOMC sees 3 hikes in 2018 (1.9%) and now projects that the equilibrium long run interest rate is 2.9% (from 3.0%). Owing to weakness in the first half of this year, the economy is now forecast to grow by 1.8% in 2016 with growth projections unchanged at 2.0% for 2017 and 2018. The PCE inflation projection for this year was tweaked slightly to 1.3% vs 1.4% but outside of that inflation projections were virtually unchanged. Both core and PCE inflation are forecast to recover to 2.0% in 2018.”