FOMC: ”Near term risks to the economic outlook have diminished” - ING

Analysts at ING explaind that the markets had been slowly pricing in a higher likelihood of a rate hike by the year-end and have returned to pre-Brexit expectations in recent days.

Key Quotes:

"But judging by the text of the accompanying statement to the Fed decision, it looks as if they are trying to prepare markets for a hike far sooner than markets have been expecting. If so, then there is still a long way for market expectations to shift, pushing up shorter dated bond yields and the USD as they do so. Scheduled Fed speakers may provide further impetus in this direction in the days following this meeting. 

As for the very formulaic Fed statement itself (there is no press briefing this month), the most important change was the introduction of the phrase, ”Near term risks to the economic outlook have diminished”. The last time the Fed talked about the balance of risks was in October 2015, the meeting before they hiked rates for the first time this cycle. Since then, they have left out this part of the text.

The Fed also revised up its assessment of the labour market – now described as having “strengthened” having previously “slowed”. Economic activity too was described as “expanding at a moderate rate” an upgrade from “appears to have picked up” back in June. 

There has been little improvement in inflation since June, but market measures of inflation expectations, which the Fed had been concerned to see declining are now acknowledged to have “remained low” rather than having “declined”.

The statement continues to say that the Fed will “closely monitor inflation indicators and global economic and financial developments”, and later still notes that any future rate decisions would be assessed against “financial and international developments”. This is “code” for market uncertainty following the UK’s Brexit vote and by an uncertain European and US political calendar in the quarters ahead."