Let’s Call the Whole Thing Off?

Let’s Call the Whole Thing Off?

Let’s Call the Whole Thing Off?

Going into today’s Fed meeting there were two main camps: those who expected a dovish hike today that hinted that December was off the table, and those (like me) who expected a hawkish punt – no hike today but language similar to Fed Chair Janet Yellen’s July testimony that indicated she expected a hike later this year and that the economy actually needed higher interest rates.

But instead of either of these, the Fed statement today can best be characterized as a (very) dovish punt. No hike today and no reason to think the Fed believes it will hike in December (and forget about October!). For starters, the statement downgraded the economic outlook in two places – describing activity as expanding at a “moderate pace” and later acknowledging that inflation compensation on TIPS (Treasury Inflation-Protected Securities) “moved lower” – which is factually true, but it is also noteworthy that the statement offered none of the qualifiers about technical or risk premium in the TIPS market. The clear indication there is that the Fed is worried about inflation expectations moving lower. Also, the statement made not one but two references to “global developments” putting further downward pressure on inflation and that while the risks to outlook are balanced, the Fed is now monitoring developments abroad. Finally, the Fed marked down its estimate of NAIRU (the non-accelerating inflation rate of unemployment) from 5.1% to 4.9%, indicating somewhat more slack in the economy than previously thought.

Although Fifth District Bank President Jeffrey Lacker did dissent, what was more noteworthy is that four FOMC (Federal Open Market Committee) participants now want no hike in 2015 (up from two participants in June), and one participant who even wants the Fed to go to a negative policy rate! But it gets even more dovish. The median blue dots in the Fed’s Summary of Economic Projections (or SEP, link here) shifted down by more than expected, with the Fed projections even more firmly in New Neutral territory until well into 2018.

Now there are a lot of data points – and potential global developments – to be received between now and the December Fed meeting. But along every dimension, this statement and the SEP that accompanies it give little indication that the Fed has conviction it will hike in December.


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