FOMC Leaves Policy Unchanged, Upgrades Growth To "Solid" From "Moderate"

In perhaps the least anticipated FOMC statement in months - with expectations of no rate-change and normalization on path - all eyes were on inflation/growth wording. Some feared a more dovish Fed might upset the exuberant growth narrative that is embedded into equity valuations (but not the yield curve), but The Fed seemed slightly more positive (and perhaps hawkish) by upgrading the economy from growth "moderately" to "at a solid rate" even as it cautioned that "Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft."

As a result of the neutral wording, a December rate hike now appears guaranteed, and the 85% rate hike odds reflect that.

Furthermore, the Fed unanimously voted to leave policy unchanged.

Additional highlights:

  • Fed says economic activity rising at solid rate despite storms
  • Fed: inflation for items other than food, energy remained soft
  • Fed: storms unlikely to alter economy’s medium-term course
  • Fed: labor mkt continued to strengthen, unemployment declined
  • Fed: spending rising at moderate rate, investment picked up
  • Fed repeats mkt-based inflation compensation gauges still low
  • Fed repeats sees inflation stabilizing around 2% medium term

And nothing from Yellen on Trump or Powellbut he reiterated that "Yellen is excellent."

The bottom line is that this was a very neutral statement with no surprise, and the three key phrases coming in precisely in line with "neutral" expectations:

  • "Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize"   
  • "Near-term risks to the economic outlook appear roughly balanced"   
  • "The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate"

Following this statement, much will depend on Friday’s average hourly earnings number and the subsequent FOMC statement in December.

Some initial, kneejerk observations from Stone McCarthy:

  • As expected, FOMC maintained the fed funds rate target range at 1.00%-1.25%. Forward guidance still for "gradual increases" in rates, depending on data. A rate hike in December is widely expected in markets, but the statement offered no substantive hints beyond the usual language.
  • There as a nod to the start of balance sheet normalization as "proceeding", but it has retreated into the background of monetary policy as policymakers emphasize that the fed funds rate target is the primary tool to adjust short-term rates.
  • The assessment of economic conditions was more upbeat with "solid" growth and continued strengthening labor market and a decline in the unemployment rate. Hurricanes caused short-term interruption in payroll gains in September, but at the same time the unemployment rate fell.
  • Hurricane impacts were touched on as "disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term," but still "unlikely to materially alter" the economic fundamentals.
  • Inflation anticipated to "remain somewhat below" objective "in the near term, but to "stabilize" over the medium term. Inflation expectations largely unchanged.
  • Near term risks "roughly balanced", "monitoring inflation developments closely".
  • In the absence of an update to the Summary of Economic Projections (SEP) and/or press briefing from Chair Yellen, attention will shift to the December 12-13 FOMC meeting. Markets have a strong anticipation of a hike of 25 basis points from 1.00%-1.25% to 1.25%-1.50%. We agree that a third hike in 2017 is probable given the strength of the economic data in spite of hurricane disruptions. We look for two more in 2018.

A simple look at how the market performed on FOMC days with a presser and without this year shows you what to expect:

  • The S&P 500 gained an average 0.23%, the DXY dollar index fell 0.33%, and the 10-year rose 7 bps after FOMC meetings in March, June and September.
  • For the non-presser meetings in February, May and July, the returns were -0.02% and 0.01%, and 0.2 bps, respectively.

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Here's The Fed's big problem... no matter what they say or do.. the market keeps sending financial conditions easier and easier....As Goldman points out - the financial conditions index has moved as if the fed has eased three times not hiked!

A December rate-hike is now pretty much baked in the cake with the 85% probability before the announcement rising just barely to 87.5%.

Since The last FOMC meeting, Treasury yields have risen but the yield curve has collapsed - signalling the market's utter disbelief in The Fed's ability to birth any kind of real sustained recovery...

(Notably the chart shows that while banks may have ben flying - they have actually merely matched the market's performance since the September Fed)

The Dollar Index has been alsmot straight up since the last FOMC meeting...

Gold has lagged since the September FOMC statement while stocks have soared (along with 2Y yields)...


Full Statement with redline comparison: