As widely expected, the Federal Reserve held interest rates steady at this week’s FOMC (Federal Open Market Committee) meeting, but other aspects of the meeting had notable implications for markets and investors.

Rising input costs from the various import tariffs continue to support prices.

The Federal Reserve’s recently communicated change in its outlook for monetary policy has led to concerns that the Fed is overreacting to market volatility, or worse, succumbing to political pressures. However, we believe there is a more compelling reason for the dovish shift.

We think the Fed is right to be cautious in the face of rising global economic risks along with uncertainties surrounding politics and policy.

While we believe the shutdown on its own would have only a modest impact on growth, the combined impact of this and other short-term drags on the economy could slow first-quarter growth close to the zero mark.

We believe the Fed is right to be cautious in the face of rising global economic risks.

We continue to view one to two policy rate hikes in 2019 as more likely.

Markets may have taken Fed Chairman Powell’s speech as a sign that the risks of central bank overtightening have receded, but we wouldn’t over-interpret Powell’s message to suggest that he is ignoring the risks of the economy overheating.

Core goods inflation was softer outside of used cars, and evidence was mixed that the recent Chinese import duty hikes are affecting consumer price inflation.

We think the September CPI print – while likely affected by statistical noise – offers evidence that inflationary pressures remain broadly manageable.

The Fed’s statement, projections and press conference support our view that the policy rate will continue to rise on a gradual trajectory.

A focus on backward-looking data could lead to an overtightening mistake.

U.S. core CPI inflation lagged expectations in August, breaking from the recent trend of generally upward surprises from various wage and price reports.

Federal Reserve Chairman Jerome Powell’s remarks at the annual Jackson Hole Symposium emphasized several important uncertainties about the structural aspects in the U.S. economy that greatly complicate the central bankers’ medium-term job of setting monetary policy.

The increase in inflation reinforces our view that the Fed will continue its gradual pace of interest rate hikes.

Overall, we believe the administration’s recent trade policies and proposals pose a negative risk to our U.S. economic outlook over the cyclical (six- to 12-month) horizon, while the longer-term impact is less certain.

The meeting minutes due in a few weeks will likely shed light on the Fed’s longer-term framework for implementing monetary policy.

The Fed’s dilemma: overtightening versus overheating.