Bored of cut and dry (and 100% spot on) explanations of why the Fed did not do a "hawkish hold" or a "dovish hike" just because Goldman's Jan Hatzius told Bill Dudley not to order a lobster sandwich at the Pound and Pence? Then you are in for a treat...
From Deutsche Bank:
September FOMC meeting felt like a blind date that was never meant to be. As the market developments were unfolding, Fed members simply didn’t like what they saw. Despite seemingly robust US data, the global economy appears too fragile and the strong USD is in the center of the crisis. The developments in EM have been negative for risk and, if conditions deteriorate further, the net result could be in a nontrivial adverse impact on DM economies. Rate hikes and further USD strength could have made things considerably worse. So, while the market waited, Fed decided not to engage.
Going into the FOMC meeting, we had to face multiple nested contingencies, from Fed reaction function, to ambiguous signals given by the economic models which largely underwent structural breaks post-2008 and eroded market’s already low confidence regarding economic forecasts. The Fed decision showed that when everything fails, common sense remains the best guide. And common sense prevailed.
This changes everything.
Power relations have been revealed; nothing will ever be the same. In that sense, despite seeming status quo, the FOMC was a true Event in the sense of being an encounter which retroactively creates its own causes.
What we now have is another data point which outlines the contours of the Fed reaction function. Fed’s communication strategy, it is becoming clear, is an equivalent of what in theater context is referred to as Removing the fourth wall whereby the actors address the audience to disrupt the stage illusion -- they can no longer have the illusion of being unseen. An unalterable spectator becomes an alterable observer who is able to alter. The eyes are no longer on the finish, but on the course -- what audience is watching is not necessarily an inevitable self-contained narrative. The market is now observing itself from another angle as an observer of the observer of the observers.
Got that? No? That's ok.
This is Deutsche Bank channeling their inner Diderot on the way to mixing Schrodinger's uncertainty principle with the greatest hits of Jacques Lacan and Jacques Derrida all in a rather amusingly metaphysical attempt to explain that the market must now account for itself when attempting to predict the actions (or inactions) of a body (the Fed) that impacts it.
In other words, it's no longer enough to for investors to consider what effect the Fed will have on the market - now, investors must come to terms with the fact that the market affects the Fed which affects the market.
Or, stripped of all the self-referential confusion: The Fed has admitted that it is market dependent and investors must somehow come to terms with their own role in the play.