In the most highly watched Fed meeting in years, the Federal Open Market Committee reaffirmed their target benchmark interest rate between 0 and 0.25 percent. The decision to delay a liftoff was largely based on downside risk. Low energy prices and tumult in the global markets are applying deflationary pressure on the dollar, which will keep the target inflationary rate well below the committee’s 2 percent objective for some time. Many of these pressures are transitory, and the first rise in the federal funds rate is expected before the end of the year.
Although the dovish Fed cited international concerns more than in recent releases, traders are taking the Fed’s decision as a vote of “low confidence” in the strength of the economy. The collection of recent headline numbers, including 3.7 percent GDP growth in the second quarter, 5.1 percent unemployment, record-pace auto sales, and an average of more than 200,000 jobs monthly this year are representative of an economy that does not require exceptionally accommodative monetary policy.
The Fed missed an opportunity to quell volatility in the domestic equity markets and confirm the strength of the U.S. economy. The equity, mortgage and bond markets had partially “priced in” an increase in the benchmark rate. After the Fed’s announcement, many banks cut mortgage rates by 0.25 percent midday to realign with the central bank. This trend could be repeated before every Fed meeting unless clearer guidance is provided. In other words, the FOMC stood on the shore as the interest rate ship sailed away, and will need to re-evaluate its stance in short order.
Maximum sustainable employment, which is half of the Fed’s dual mandate, was a re-explored topic during the September meeting. In late 2012, the Fed tied any potential rate hike to a 6.5 percent unemployment rate. Now, the Fed is moving away from the official rate of 5.1 percent and quoting U6 unemployment, which includes workers that are employed part time but would rather have full-time jobs. Continuous shifts in the FOMC’s justifications could be a sign that Janet Yellen is “swinging for the fences” similar to Alan Greenspan’s committee in the late 1990s. However, the Fed will need to normalize monetary policy at some point to have leverage when the economy does begin to falter.