The highly anticipated September 16-17 FOMC meeting came and went without a rate hike. The statement was mostly dovish with one hawk, Jeffrey Lacker, voting against the action and preferring to raise rates.
I myself thought this would be the day the FOMC would move, but after 55 meetings we remain at the zero bound. The US economy is steadily moving forward and energy prices seem to have found a soft floor. Why rattle the volatility shaker and raise rates in December when balance sheets and risk takers are finished for the year?
I underestimated the impact that recent global developments had on the Fed. Many analysts have been highlighting weakness in China for the past year. This should not have come to a surprise to the committee. The dovish statement points to “recent global economic and financial developments…that may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
I think it is fair to say that there will always be global developments but the Fed will continue to monitor these developments going forward.
It will take some time to quantify the effects of recent world events on the US. Thus now I am even more uncertain about a rate hike this year. As I listened to Chairwomen Yellen in her press conference I was given some hope that there is still a chance for a rate increase in 2015.
Chairwomen Yellen left the door open as she mentioned an “October rate hike is still possible” and called it a “live event.” She followed up that employment or inflation “don’t need to fully reach their objective” in order for the Fed to tighten. Chairwomen Yellen was optimistic about the path of inflation as the “drag from import prices and energy prices should dissipate.”
The bond market rallied going into the decision and continued to do so afterward. The 10 year Treasury started the day at 2.30% and finished at 2.19%. The stock market ended the day down after initially moving up on the news that low rates would continue.
I sit at the end of the day knowing one thing. We are one step closer to the Fed raising rates. The same thought comes to my mind when I hike mountains. Every step I take I think to myself that I am getting closer to the top, but sometimes it might take me longer than I thought.
Bill Lierman, CFA®