The Fed decision leaves us looking at having to go through the whole weary process of angst again this year – Yellen signalled a hike before year end, and (though we expect December) October is still a possibility. We look for one US hike this year and four next.
Four points from the Fed. First, potentially most troubling, the Fed could be interpreted as being held hostage to the whims of financial markets as a result of today's inaction. It was bad enough when expectations were data dependent. Data and market dependent is not a pretty prospect.
Second, it is time to dust off behavioural or political economic models and retire mathematical models. The widening spectrum of views revealed in the infamous "dots" suggests that a naïve hawk versus dove interpretation is inappropriate. This is a multifaceted FOMC dealing with multiple policy options.
Third, the Fed put in the market calming caveats that were expected to accompany a rate hike – reassurance on future quantitative policy and the future path of tightening. We got everything except the hike. Fourth, could this be a policy error? Clearly it could, if market volatility is exacerbated by this decision.
