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The Fed leaves the interest rate unchanged. There is one dissenter:  Lacker, as expected. One participant said they will not hike until 2017 but the majority sees a hike later this year. The Federal Reserve is monitoring developments abroad – watching China? The dot plot looks lower.  It looks like one hike in 2015, a one and done, with a lower projection later on. Only 13 see a hike in 2015, contrary to 2015 beforehand, but this is still a majority.  

The USD crashes as the dovish components emerge.

Follow a live blog of Yellen’s press conference:  global events cause delay, but hike still on the cards in 2015

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Highlights

  • GDP is expected to grow 2.1% in 2015 and 2.3% in 2016 – this is higher for 2015 and lower for 2016.
  • The unemployment rate is expected to  stand at 5% in 2015 and 4.8% in 2016, 2017 and 2018.
  • Inflation is expected to hit 0.4% this year, down from 0.7% seen beforehand. In 2016, it stands at 1.6%, down from 1.7% projected earlier.
  • The Fed Funds Rate carries expectations for 0.4% instead of 0.6% for 2015 and 1.4% instead of 1.6% for 2016.

Apart from the dissent of Lacker, the statement is mostly unchanged, with the initial paragraph looking familiar:

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Here is the reference to  international developments:

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Markets were divided about the decision of the Federal Reserve regarding raising the rates for the first time since 2006, but they were leaning towards a “no hike” scenario. However, apart from the interest rate, the wording of the statement, the forecasts, the dot plot, an option of a press conference in October and any other thing Yellen says were all up in the air.

Market reaction and quick analysis

This is dovish because:

  • No rate hike
  • Lower rate path
  • Lower inflation forecast
  • Global worries

The only hawkish thing is one dissenter voting for a rate hike, but this just emphasizes how dovish the statement is.

  • EUR/USD traded around 1.13. It is at 1.1420 afterwards.
  • GBP/USD around 1.5520 and 1.56 after.
  • USD/JPY under 121 and 120.30 after.
  • USD/CAD around 1.32 and 1.1316 after.
  • AUD/USD is under 0.7150 and 0.7220 after.
  • NZD/USD around 0.6310 and 0.64 after.

Background

The Fed had a lot of dilemmas, described in depth in our Fed preview. In general, the  employment mandate is looking good while inflation is looking weak. The US economy is improving but there are shadows above the global one, and it goes on and on. We preferred balanced scenarios: either a hike with a sweetener, aka a “dovish hike” or a no-hike with a hint of an upcoming on, aka a “hawkish hold”.

Here are all the updates for the big event