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 (FOMC) increased the Fed Funds rate target range by 25bps to 2.00%‐2.25%.
The September FOMC statement maintained existing language reflecting the solid economic backdrop in the US, roughly balanced risks to the outlook and the appropriateness of further gradual rate hikes. The most interesting change was the reference to the stance of monetary policy, which was previously described as remaining accommodative, has been subsequently removed. This change further distances the Fed from the extraordinarily easy policy and explicit forward guidance used at the zero lower bound. The Fed statement did not reference the balance sheet but the process will continue in the background. We expect more conversation about the future of the balance sheet run-off (which will hits the maximum run-down rate in October) to occur in the coming months.
We can break the statement into three parts:
There were no dissenters. Richard Clarida, the new Vice Chair of the Fed, voted for the first time at this meeting.
Summary of Economic Projections
Investors had priced in nearly 100% probability of a rate hike at this meeting, so the SEPs and the “Dot Plot” took on greater importance. Within the projections, the growth forecasts were modestly upgraded. The inflation forecasts were mostly unchanged. The median forecast of core PCE continues to show a small overshoot above the Fed’s target in 2019 & 2020. The unemployment rate estimates were also mostly unchanged.
The median dots for 2018 remained unchanged reflecting a total of 4 hikes, but the dispersion around this forecast declined. The 2019 median dot was unchanged reflecting 3 additional rate hikes in 2019. The 2020 dot was unchanged reflecting 1 additional rate hike. A forecast for 2021 was added in which the median of the committee expected no change in the Fed Funds rate between 2020 and 2021. The long-run dots shifted up modestly from 2.875% to 3%.
Chair’s Press Conference
Chair Powell remains upbeat on the economic outlook and the progress the Fed is making at returning rates to a more normal level. Chair Powell also explicitly addressed the meaning of removing a sentence in the statement describing policy as accommodative. He stated it does not signal a change in monetary policy and it is a sign that policy is proceeding in line with expectations. Powell went through great pains to highlight the uncertainty of policy in the future as many fluid crosscurrents make precision on esoteric measures of slack, equilibrium rates and other unobservable factors less clear.