• The target range for the fed funds rate was left unchanged at 1.00-1.25% as expected.
  • The Fed announced they will implement a previously-outlined plan to begin shrinking their balance sheet by tapering reinvestment next month. The fed funds rate remains the committee’s main policy tool and the Fed does not expect to make changes to the balance sheet normalization program outlined in June.
  • An otherwise little-changed policy statement indicated the Fed will be looking through the transitory effect of recent severe weather on economic activity and inflation.
  • Economic projections only saw minor tweaks. Current-year GDP growth was revised higher but core PCE inflation is expected to be slightly lower.
  • The ‘dot plot’ continues to show a majority of committee members expect one more rate hike this year, while a median of three hikes are still seen as appropriate next year.

Our Take:

There was little doubt about the outcome of today’s meeting—a change in reinvestment policy and pause in rate hikes had been well-signaled by policymakers. So instead the focus was on the Fed’s thoughts on inflation and any implications for the pace of tightening outlined in the ‘dot plot’. In the event, Chair Yellen’s comments largely stuck to the script: inflation has been held down by some transitory factors and should return to the Fed’s 2% objective as those factors dissipate and tighter economic and labour market conditions put upward pressure on prices. That view was backed up by a little-changed set of ‘dot plot’ projections showing another rate hike is likely by the end of this year with three more rate hikes seen next year. Confirmation that gradual tightening is likely to continue despite slowing spot inflation prompted a modest USD rally and slight selloff in Treasuries.

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Upcoming economic reports are likely to be impacted by severe weather—there was already evidence of that in the latest data for August. While those effects should prove transitory, they will make it a bit trickier to get a read on the economy’s underlying growth trend. The Fed is well aware of this, so we don’t see a couple of disappointing reports knocking them off their plan to continue on a path of gradual rate hikes. That path remains data dependent, however, and further downside surprises on inflation in particular might lead to a more cautious removal of accommodation. In that sense it was encouraging to see some signs of stabilization in recent CPI data. We continue to expect one more rate hike in December and further moves next year.


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