Hike on the horizon as “hawkish hold” order of the day at Fed Press Conference

21st September 2016 By: Ranko Berich

Fed Press Conference – 21/9/16

The Fed’s September meeting has turned out to be a “hawkish hold”.

While there was no hike today the FOMC has signalled that markets should expect an increase this year. Despite this clear indication, today’s press conference was another triumph for the doves, particularly Williams and Brainard, who both got massive nods to their major policy ideas from the previous year.

Yellen was unusually frank about why the FOMC did not go ahead and hike rates at this meeting: inflation was below target, and there was still slack in the labour market. It seems like the FOMC’s hawks have lost the debate about if the Fed should hike proactively to mitigate the risks of an upside surprise to inflation, and that caution will continue to be the Fed’s prime directive.

Today underlined the growing influence Lael Brainard has within the FOMC. In her opening statement, Yellen acknowledged the Fed could quickly respond to an upside surprise to inflation, and could therefore afford to be patient with rate hikes. This is an argument that Brainard has been making for almost a year now, and it’s obviously had an influence. If the nextPresident has a shred of sense, Brainard will be considered as the next Fed chair.

In the absence of seriously adverse developments in the economy, December is all but locked in for a rise. But today’s projections made it clear that the Fed’s estimation of the r* or equilibrium rate of interest has fallen drastically. This implies a lower terminal rate for policy, and a more gradual path to that terminal rate – both bringing potentially negative effects for USD in the medium term.