Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):

Consistent with our and the market’s expectations, the Federal Open Market Committee (the FOMC) left the Fed Funds rate unchanged, at 1.0%‐1.25%. The Fed’s only means of communication at this meeting was the typical FOMC Statement.

The FOMC used the July Statement to prepare the market for an official balance sheet announcement at the September meeting. By effectively “marking-to-market” recent economic developments and indicating that a change in the Fed’s reinvestment policy would be coming “relatively soon”, the Committee readied the market for the balance sheet run-off while leaving the prospects for additional rate hikes dependent on inflation data.

We can break the Committee’s statement into four parts:

• Economic Assessment – the Committee upgraded its already positive assessment of both the labor market and the overall US economy. They also softened their assessment on inflation, acknowledging the persistent weakness in the data.
• Outlook – the Committee kept the outlook unchanged and expects an eventual return of inflation to its 2% objective.
• Forward Guidance –the Committee continued to describe future actions as ‘gradual’ and stressed their current policy stance was accommodative.
• Balance Sheet – The statement indicated that a change in existing investment policy would be appropriate “relatively soon”.

There were no dissenters at the meeting.

Our view: 

• The FOMC was fairly balanced reflecting a mark-to-market on the recent data. They are confident that the positive developments in the labor market and the broader economy will allow them to push ahead with balance sheet reductions later in the year. The Committee is waiting for signs that the recent soft patch in realized inflation is reversing before raising the policy rate for a 3^rd time in 2017.
• The Committee continues to favor a gradual approach to tightening policy as they juggle incoming information on inflation, growth, and fiscal policy, as well as the market’s reaction to balance sheet normalization. We view the balance sheet reinvestment plan laid out in the June addendum as essentially a “done deal”. Ideally, once the process starts in September, the balance sheet normalization will run on autopilot as a secondary tool while rate hikes will remain the primary tool of removing accommodation. Any additional changes to the Fed’s schedule for balance sheet shrinkage once it begins will likely only be made if economic conditions were to deteriorate materially.
• Despite the recent weakness in inflation readings, future rate hikes are still warranted by the economic and labor market data. Fiscal policy initiatives will continue to play an increasingly important role in the FOMC’s decision-making process for the number of rate hikes the US economy can handle in 2018.
• We expect the Fed will raise rates 1 more time in 2017. Improving global growth, expectations of fiscal expansion and regulatory reform will create an environment that is supportive of risk assets at the expense of Treasury yields, despite the coming contraction in global central bank liquidity. We expect that the reduction in global central bank liquidity will move into the market’s purview as the year progresses.  Inflation has remained stubbornly weak for the past 4 months but should return to a pace closer to the Fed’s longer-run target. This will allow 10-year yields to move higher through the remainder of 2017, toward our year-end target of 2.5 – 3%.