The following is a selection of SEB Gtoup's reaction to today FOMC policy decision.
Contrary to our forecast of a rate hike, the FOMC stands pat at the meeting today and Lacker was the only one voting against the decision. Meanwhile the long long-run fed funds forecast was lowered from 3.75 percent to 3.50 percent. According to the new projections 13 of the 17 officials still expect a rate hike this year; the corresponding numbers were 15 versus 17 back in June. That being said, the statement doesn’t exactly read like the prelude to a rate hike in the very near term. Having listen to Yellen, however, our new forecast is for liftoff in December.
Global economic activity and market turmoil played a central role in the decision; according to the statement global economic and financial developments may restrain economic activity somewhat and put further downward pressure on near-term inflation. With respect to the labor market, the Fed is still looking for "some further improvement" and reasonable confidence that inflation will be returning to target. But let us be clear, first and foremost it is the "global developments" that stopped a rate hike today. Only looking at the US economy, certainly crisis-level interest rates are no longer needed. The problem with this “global developments” reference is that there will always be lots of uncertainly ahead of the Fed liftoff since it is such a huge decision. The question is if global markets really will behave any better ahead of the December meeting? And a new risk such as failure to increase the debt ceiling could push a December hike off the table.
At the press conference, Yellen claimed that the October meeting is “live” but what else could she say? It certainly didn’t sound like a rate hike is in the cards some six weeks from now. An October hike would certainly be an odd move too since the Fed would call for a press conference in advance according to the Chair. It would be next to impossible to keep such a call a secret. As such, the December meeting is much more likely with respect to liftoff, liquidity issues notwithstanding.
Another dovish comment from Yellen was that the 2 percent inflation target is the objective, but not the ceiling according to the Chair. So some overshooting is okay and this basically is why we still have rock-bottom interest rates despite the fact that the unemployment rate is just a tad above 5 percent. That said, Yellen has not lost her faith in the Phillips curve; according to her further improvement in the labor market will bolster confidence that inflation will go back to target. The December meeting still is a good bet for liftoff in our view. The risk of an overheating economy is the best argument for lifting rates this year according to Yellen. According to the Chair, it would be bad policy to leave rates unchanged for much longer.