The time arrived but the Fed couldn’t bring itself to raise rates for the first time since the Financial Crisis. In a hugely anticipated FOMC meeting, the market had priced just over a quarter percent chance of a hike, and just under 50% of economists expected a move, but they remained on hold.

The statement was relatively unchanged, but the addition of “monitoring developments abroad” cued markets as to the cause for the delay. The commentary on the labour market and inflation were relatively unchanged, and show a level of comfort with their path. Indeed, the median forecasts for unemployment were lower, while the outlook for the core PCE (the Fed’s favoured inflation rate) were only marginally lower. So it is the uncertainty surrounding global demand, and volatile EM in particular, that is holding them back. The argument goes that this volatility and growth concern strengthens the USD and lowers oil prices; both of which lower inflation and make it more difficult for the Fed to achieve their inflation target.

The thing to note is the circularity of this problem: they don’t hike because EM is under pressure, EM is under pressure because the Fed is going to hike, the Fed doesn’t hike, EM rallies, the Fed turns hawkish again, EM comes off – and so it may go. We need a circuit breaker; hopefully one to the upside, not the downside of the risk spectrum.

Markets initially reacted as you would expect to the lowering of the median ‘dot points’ for the Fed Funds expectations (these dropped to 0.375% for 2015 from 0.625%, but more importantly, showing a slow and low profile for the hiking cycle, to 1.375% for 2016, from 1.625 and 2.625% for 2017 from 2.875%). Equities rallied, yields were lower and the USD was lower.

Then we had Yellen’s speech, where she went on to elaborate on their concerns. She basically provided a guide to the fact that this was a postponement of a hike, not a cancellation. I quote (and thanks to Raiko for this):

“Returning to monetary policy, we recognize that there has been a great deal of focus on today’s policy decision. The recovery from the Great Recession has advanced sufficiently far. And domestic spending appears sufficiently robust. That an argument can be made for a rise in interest rates at this time.

We discussed this possibility at our meeting. However, in light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2% in the medium term.

Now, I do not want to overplay the implications of these recent developments. Which have not fundamentally altered our outlook.”

You can find dovish and hawkish commentary through the speech and the statement. Concerns about the labour market, the difficulties of achieving 2% inflation. The lower Fed Funds rate profile. But they are still looking to normalise rates at some point. Given this, the next meetings remain ones at which the Fed may raise interest rates. And as such, markets will likely remain in that Fed obsessed limbo.

Perhaps in recognition of this, equity markets and the higher risk currencies (AUD, NZD in particular) have faded their initial enthusiasm. Yields remain broadly lower, in recognition of the delay in hike and lower Fed Funds profile.

We may now see some stabilisation in risk markets, in recognition of the delay but if we do get a weaker USD and oil prices stabilise, expect the merry-go-round to resume.

Coming Up

As we absorb the aftermath of the Fed meeting it might be hard to get the market to re-focus on local events; although, there isn’t much to focus on. Locally, the RBA Governor is speaking at the House Economic Committee, although nothing new is expected.

China’s property prices do tend to get a little attention, and were a little better last month. In the context of concern regarding softer Chinese economic growth, a positive surprise here may be well received by risk markets.

There is little top tier data in the US, but the Fed’s Williams and Bullard are speaking Saturday morning our time. This may be an opportunity for them to elaborate on the FOMC decision and outlook. If there is any uncertainty after today’s moves then these become closely watched.

Overnight

On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years -10.19bp to 2.19%. On commodity markets, Brent crude oil -1.23% to $49.14, gold+1.1% to $1,131, iron ore +0.3% to $57.37. AUD is at 0.7168 and the range was 0.7138 to 0.7276.

• Fed on hold, lowers Fed Funds profile, shows concerns about international factors.
• US Philly Fed -6A, +5.6E, +8.3P

For full analysis, download report:

• Markets Today: 18 September 2015 (PDF, 324KB)

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