US: FOMC remains on hold – BNPP

Research Team at BNP Paribas, notes that the FOMC on Wednesday kept rates unchanged, against our expectation for a 25bp increase.

Key Quotes

“There was a surprisingly high number of dissents (3), with long-run estimates of growth and interest rates revised lower. The median path of policy in the dot-plot is now flatter and is consistent with only one hike before year-end and only two in 2017. A key change to the policy statement was the Fed’s assessment that near-term risks to the economic outlook are “roughly balanced,” an upgrade from July when the Fed said that “near-term risks to the economic outlook have diminished.” Generally, when the Fed says risks are balanced, it is only at meetings when they actually hiked rates. The phrase “roughly balanced” means “almost there”, in our view, barring major shocks.

Since there is consensus on the FOMC that the economy is virtually at full employment (current unemployment rate is 4.9% end-2016 and long run forecast 4.8%), we suspect that the decision to delay reflects divided views about the inflation outlook and risk aversion ahead of the upcoming US elections.

The Fed appears to be positioning for a hike in December, and at this stage we see that outcome as more likely than not. Saying it is waiting for more evidence in the time being, despite the case for a rate hike having strengthened, suggests that barring significant events the rate hike will not be long in coming. A December rate hike could prove difficult if there are foreign shocks, for example. With payrolls currently running at a robust pace, they will likely be running at a slower pace at the December meeting, while Q3 GDP looks robust, albeit with slower consumer spending.”