September FOMC: Federal Reserve Holds Rates Flat

September FOMC: Federal Reserve Holds Rates

Talking Points:

- September FOMC meeting brought no rate hike with a 7-3 vote.

- Attention now moves to meetings in November and December. With US elections taking place approximately one week after the November FOMC meeting, December is looking considerably more likely for any future actions or statements.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

September FOMC Meeting

At today’s widely-awaited meeting from the Federal Reserve, the bank has decided to hold the deposit rate flat with no changes to near-term monetary policy.

Story developing; article will be updated during/after the accompanying press conference.

Context Ahead of September FOMC Meeting

Coming into the September Federal Reserve meeting, there was quite a bit of divergence between FOMC and market expectations around near-term policy adjustments. Over the past few months, the Federal Reserve has been getting increasingly more hawkish. In April, we saw the bank remove a key phrase from their statement to give a ‘less dovish’ read to markets. Previously the Federal Reserve had mentioned that they were cautious around ‘global risks’ within the economy, and this was seen as a point of resistance to future rate hikes. But when this statement was removed in April, it gave the allusion that the bank may be more aggressively entertaining policy options for tighter conditions.

Later in July, a very similar scenario happened when the Federal Reserve made another hawkish tweak to their statement, but this time it was the addition of a new phrase saying that ‘near-term risks to the economic outlook have diminished.’ This implied that the bank was feeling more comfortable with the recovery in the US economy and, again, may be more aggressively entertaining options for tighter policy in the coming months.

And towards the end of August, we had another hawkish indication from the Federal Reserve with comments from Chair Yellen and Vice Chair Stanley Fischer at the Jackson Hole Economic Symposium. Both officials denoted the possibility of a rate hike today at the September FOMC meeting, but it was Mr. Fischer’s commentary that really seemed to drive price action.

So, if all of this is giving the inference of higher rates, why is this topic being so widely debated or so heavily watched? The reason is similar to the allegory of the ‘boy who cried wolf.’ After numerous pleas towards higher rates in the recent past, in many cases causing risk aversion and fear, markets appear to be growing increasingly skeptical that the Fed will actually hike rates in the near future unless the economy is absolutely ready for those tighter conditions. The Fed has talked up higher rates numerous times only to back down in the face of market sell-offs.

This has brought up the concept of the ‘Fed Feedback Loop,’ where monetary policy is being shifted or adjusted based on asset prices rather than directly on the factors of the dual mandate (inflation and employment) of the Federal Reserve. As stock prices have moved higher, the Fed’s grown more hawkish. And when stock prices then turn around in response to the expectation around tighter monetary conditions, the Fed has gotten more dovish.

Today’s meeting represents an opportunity for the Federal Reserve to move back in the driver’s seat: Multiple Fed members have talked up higher rates, but few market participants appear to actually be expecting a hike today (as of this writing CME Fedwatch probabilities are at around 18% for a hike today). If the Fed does actually hike today, this could address the apparent co-dependence that markets have appeared to build-in around Fed policy.

--- Written by James Stanley, Analyst for DailyFX.com

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

Contact and follow James on Twitter: @JStanleyFX

September FOMC: Federal Reserve Holds Rates Flat
September FOMC: Federal Reserve Holds Rates Flat
https://rss.dailyfx.com/feeds/all