In the week before the September FOMC meeting, US cash rate markets were giving the odds of a rate increase at only 30%. On the other hand, the US bond market was consistently raising 10y and 30y bond rates in anticipation of a rate hike. Prior to the meeting Larry Summers, ex-Secretary of the Treasury said, “This is not the time for a tightening in monetary policy.”
In the end the Federal Reserve agreed with Summers and left official Fed rates unchanged.
Markets immediately reacted in a sudden burst of activity. US 10y bond rates dropped by 11bps to 2.19% and 30y rates dropped 8bps to 3.00%. Australian bond markets weren’t open at the time but the overnight bond futures markets indicated an 8bps drop in the 3y rate to 1.90% and an 11bps drop to 2.79% for the 10y rate.
Janet Yellen, the Federal Reserve chief said the first increase in rates for nearly a decade, would be appropriate after “some further improvement” in the labour market and when the committee is “confident” inflation is rising towards 2% in the medium term. It also appears offshore developments and China-inspired volatility, played a part in the Fed’s decision to defer the rise. “These developments may also restrain U.S. economic activity somewhat but have not led at this point to a significant change in the Committee’s outlook for the U.S. economy.” Shane Oliver of AMP Capital said this showed the Federal Reserve to be “conscious of global risks” and the resulting impact on the US.
BT took the view that the US central bank’s statements indicated there would still be a rate rise this year as did ANZ, who said they had expected a move in September but now expected December to be the earliest meeting for an increase. On the other hand, PIMCO said the statement “can best be characterised as a very dovish punt…no hike in September, no reason to think it will hike in December.” However, thirteen of seventeen FOMC members are forecasting a hike this year and the Fed Reserve’s own forecasts show an expected rate of 1.50% in late 2016, 2.50% in late 2017 and 3.50% in 2018.”