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The Fed - no change

18 September 2015
economy, Fed, FOMC, global, The
Concerns about recent global economic and financial conditions trumped further improvement in the labour market to see the Federal Open Market Committee (FOMC) take the cautious path and leave US interest rates unchanged today.   In the press conference Chair Janet Yellen signalled, unsurprisingly, that China and emerging markets are central to those concerns.
In July it seems the only thing that mattered to the Fed was the domestic labour market.  The key sentence in today’s statement was more global:  “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.  The good news in that is the Committee is aware of its actions having global implications and that they are not going to do anything to derail the global economy.
Aside from that, there were only minor tweaks to the Statement.  The Committee acknowledged the further decline in the unemployment rate, solid jobs gains, improvement in the housing market, modest gains in household spending and business investment, but also that inflation continues to run below the Committee’s longer run objective.  In the press conference Yellen continued to point to the recent downward pressure on inflation being largely due to factors that will ultimately prove to be transitory (the strong US dollar and commodity prices).
Changes to the Summary of Economic Projections lowered the median forecast for the Fed funds rate by around 25 bps right across the projection period.  The median longer run forecast was also lowered to 3.5% from 3.75% which is getting incrementally closer to our own estimate of 3.0%.  Changes in the median projections for growth, the unemployment rate and core inflation were all tweaked with no real surprises.  
So where to from here?  
The Committee continues to see inflation rising towards 2% over the medium term so a rate increase is coming - it’s still just simply a question of when.  A rate rise this year is still favoured by the majority of FOMC participants, although one Committee member favoured a rate cut into negative territory.  Yellen offered a wry smile when questioned about that in the press conference, stating the Committee didn’t spend much time debating that option.
October and December are still live for lift-off.  Seems the only question now is when global uncertainty will be resolved…
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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