The Federal Reserve surprised no one when it announced no change in interest rates on Wednesday.
Given persistently low readings on inflation, deceleration in the global economy, and elevated volatility in the financial markets, most economists don’t see the Fed tightening monetary policy with interest rate hikes until early 2016 at the earliest.
However, the Fed tweaked its communication about the direction of monetary policy via a simple four-word phrase: “at its next meeting.“
“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress — both realised and expected — toward its objectives of maximum employment and 2 per cent inflation,” the Fed said in its statement.
Now, the surprise is not so much the nature of the guidance. Rather, it’s the fact that they didn’t clearly rule out the next meeting — which occurs in December — as the time when it would raise rates, ending the era of zero interest rate policy.
“HAWKISH,” said Renaissance Macro’s Neal Dutta, who specifically pointed to these four words.
Indeed, stocks tumbled and the dollar surged, something that has been known to happen when traders interpret the Fed’s message as hawkish.
“In short, then, the December hike now hinges on the next two employment reports,” Pantheon Macroeconomics’ Ian Shepherdson said. “Some combination of payrolls, unemployment and wages signalling continued improvement will be enough; we’re leaving December as our base case, though it is by no means a done deal.”