No Change in Federal Funds Rate

September 18, 2015

The long waited FOMC meeting is behind us and the outcome was clearly disappointing for the USD bulls. The US dollar is down across the board and the Federal Funds Rate is exactly at the same level as it was 24 hours ago. In short – no change in the FED’s monetary policy. The market’s reaction to the rate decision was remarkably calm and civilized. Price action was a bit choppy but nothing more than usual, which in itself was a pretty good indicator, that the whole event was priced in and the suprise would have been a 0.25% rate hike.

Last Sunday/Monday we published an article about the FOMC and pointed out four possible scenarios and outcomes for the event. Yesterday, it turned out that Scenario nr 4 was the closest to the real thing but not exactly.

Scenario #4
Fed keeps the rates unchanged but during the press conference, Ms. Yellen confirms that they are ready to hike in December.

The first part turned out to be accurate but the second part, regarding the December hike, is more than questionable because Ms. Yellen was fairly dovish yesterday and there were very few signs or comments that could have been translated as “Yes! We are ready to begin in December”. Even though, Ms. Yellen made it very clear that every meeting is a potential “liftoff meeting”, including October, it is fairly unlikely that they would act so quickly, because the overall economy does not change much in just one month.

Furthermore, one the most interesting parts of the whole event was the release of the so-called dot plot, which also confirmed that we should not expect any change in the Federal Funds Rate this year. It turns out that one member of the FOMC has gone in the other direction and suggests that the FED should lower the interest rates into the negative territory before anything else.

I do find it hard to believe at the moment that a NIRP scenario is realistically on the table but you never know, anything can happen, especially in the financial world. However, it does not change the fact that NIRP has been mentioned or suggested as a possibility and that could be a major game changer in the medium term outlook.

Time will tell.

Capital Properties FX