Here's What Wall Street Is Saying About the Divided Fed

A hawkish hold, but a dovish trajectory.

Finding Consensus Among Federal Reserve Dissent

Though the Federal Reserve elected to maintain its benchmark policy rate at a range of 25 to 50 basis points, as was almost universally expected, the September meeting was not without fireworks.

Three voting members dissented from that majority decision, preferring an increase in interest rates at this meeting, while the dot plot revealed that the same number of Fed officials don't think it will be appropriate to raise rates in 2016 at all.

Policy makers faced blowback from a heated election campaign, with Janet Yellen fielding questions on whether political pressures have any effect on policy making in light of Republican nominee Donald Trump's claim that rates are being kept low to help the incumbent president. The Fed chair flatly denied the charge.

Here's what Wall Street had to say about the Fed's decision, policy makers' assessment of the U.S. economy, Yellen's press conference, and the divide that's entrenching inside the central bank. The interpretations, taken from analysts' notes, represent as diverse a spread of opinions as those of the Fed officials they're commenting on. 

Scotiabank's Derek Holt

The overall statement may be setting up another dovish hike in December, just like last December’s move, but at this point that’s a binary bet contingent in part upon the flow of data and market developments but also — regardless of what they say publicly — the outcome of the U.S. election on November 8th. That is not a question of partisan politics. It is common sense when the range of policy options is so wide and in some cases — like trade policy — so potentially damaging to the outlook.

Barclays's Michael Gapen and Rob Martin

The non-hike was very close call. The language in the statement suggests that the committee was quite undecided in its view. More clearly, with three members dissenting against the decision and three, presumably different, members calling for no further rate hikes this year, the committee is more split than it has been at any time in our memory.  This split in views will make FOMC communication and action increasingly difficult this year. In particular, we believe that this level of dissent will make it difficult for the committee to keep the possibility of December rate hike live in the minds of market participants and, indeed, households and businesses. 

Bank of America Merrill Lynch's Michelle Meyer

The FOMC clearly signaled a hike before the end of the year in both the language and the dots. The Fed made two important changes to the statement. First, the committee noted that near-term risks to the economic outlook "appear roughly balanced". This is an important step for the Fed to justify hiking rates at an upcoming meeting and is a page out of the playbook from last year. We expected the Fed to make this language change.

Second, the FOMC noted that "the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of further progress toward its objectives." This is a strong signal that the Fed is planning to hike in an upcoming meeting. It is not explicit calendar guidance, but it is a small step in that direction.

Renaissance Macro Research's Neil Dutta

Data dependence is not just about high frequency data releases. Instead, it is about how the Fed interprets the data and inferring intent. The Fed decided not to hike because they do not want to. They still want to this year, however. A case can be made that the Fed has stepped away from data dependence... The asymmetry of risks is front and center in this statement. Waiting for more evidence to hike even as the case for hiking has strengthened suggests that even as the Fed sees balanced near-term risks, they continue to take out insurance against potential downside risks in the longer-term. 

ADM Investor Services's Marc Ostwald

Three dissents including the once uber-dovish Rosengren says a lot about the divisions between the Fed board and regional Fed presidents. Yellen admitting that her forecasting abilities are very poor (“I can assure you that any specific projections I write down will turn out to be wrong, perhaps markedly so.”), but then having the chutzpah to suggest that the long term neutral rate was lower than previously thought, and that there is more slack in the labor market than previously thought, clearly makes a mockery of a 'data dependent' policy.

RBC Capital Markets's Tom Porcelli

The reality is that having three Fed members dissent from the hawkish side tells you nothing about the direction of policy in the months ahead. The last time we had three members dissent in favor of tighter policy was back in September 2011 when the committee decided to introduce Operation Twist. Not only did we not see another hawkish dissent over the ensuing five meetings, but we actually had a member dissent from the dovish side at the November and December 2011 confabs. The bigger point of course is that things can change just that quickly. We offer this up simply as food for thought.

Morgan Stanley's Ellen Zentner

This is a Committee that would like to deliver a hike this year if at all possible. Justifying a hike this year will not be easy. The incoming data, contrary to Yellen's assessment, paints the picture of declining momentum and suggests 4Q16 will be sluggish. At the same time there is no evidence the economy is overheating, slack remains, and the path to a lower neutral will also be shallower.

CIBC World Markets's Royce Mendes

While the statement and dissenters argue for more near-term hawkishness from the central bank than had been expected, the SEP favours a longer-term dovish view of the economy. The median of members now only sees two rate hikes next year, while the forecast for the longer-run neutral rate came down a tick to 2.9%. We continue to view December as the most likely timing for the next rate hike, although that's contingent on a rebound in economic data.

Bank of Montreal's Michael Gregory

The FOMC included a net risk assessment for the first time this year: “Near-term risks to the economic outlook appear roughly balanced.” This is similar to the language used before December’s liftoff (“nearly balanced” back then). And, to top it off, Cleveland’s Mester and Boston’s Rosengren joined Kansas City’s George in dissenting in favor of a rate hike today. The last time three dissenters went the same way was in September 2011 (and it was a hawkish dissent that time too).

Toronto-Dominion Bank's Michael Dolega

 It would appear that the views of the Committee members are quite sanguine, with most of the downgrades to the economic outlook viewed as in the rear-view at this point. Importantly, the Fed views economic momentum to have accelerated from the first-half slowdown despite still weak business investment, with moderate growth expected for the remainder of the forecast horizon on the back of solid fundamentals in domestic demand.

Nordea Markets's Johnny Bo Jakobsen

Today’s FOMC statement and the new dot plot reinforce our expectation that the Fed will hike rates again in December. We continue to believe that a Fed move at the next FOMC meeting in early November is rather unlikely, just one week ahead of the presidential election on 8 November. The renewed downward revision of the Fed’s estimate of the neutral rate adds to the downside risks surrounding our forecast of 3 Fed rates hikes in 2017.

JPMorgan Chase & Co.'s Michael Feroli

The statement noted risks to the outlook were “roughly balanced,” but more surprising was the addition of the phrase that the case for a hike has strengthened, but that the Committee decided “for the time being, to wait for further evidence of continued progress toward its objective.” The phrase “for the time being” is obviously somewhat ambiguous; a case could be made that this points to November, thought we still think the odds for a hike at that meeting remain well below 50 percent.

Citigroup's William Lee

Chair Yellen said that the Committee delayed raising rates at this meeting, in part, because inflation was low and the FOMC believed that labor market slack continued to be absorbed relatively slowly. This reduced the urgency for an immediate rate hike. Moreover, the Committee perceived risks to be asymmetric when policy rates are near zero, so that it would be prudent to keep rates lower for longer, rather than risk the downside consequences of a premature increase.

Societe Generale's Omair Sharif

We will note that Yellen cited one "very welcome development" with respect to the labor market. Specifically, she said the fact that "unemployment measures have been holding steady while the number of jobs has frown solidly shows that more people, presumably in response to better employment opportunities and higher wages, have started actively seeking and finding jobs." This would indeed be a welcome development if it was true, but data on labor force flows shows that the churning of the labor market each month has cooled rapidly in recent months, and more of the rise in the labor force that Yellen is referring to actually reflects fewer exits from the workforce as opposed to more entrants from outside the labor force. As such, it is not clear to us that this is a positive signal.

Credit Suisse's Jeremy Schwartz

This meeting reaffirms our view that the Fed is increasingly timid about raising rates and sees little downside to a cautious approach. In the press conference, Yellen noted that the Committee is “not seeing evidence that the economy is overheating,” and “there appears little risk of falling behind the curve.”

Overall, we still expect the Fed will not hike rates until May of next year.

HSBC's Kevin Logan

The FOMC can judge that the case for an increase in the federal funds rate has “strengthened” since many of the risks that were highlighted by the FOMC earlier in the year have diminished. These included such developments as falling commodity prices, international financial market turmoil, a slowing labor market and Brexit. That being said, at 1.6 percent for most of this year, core inflation remains persistently below the FOMC’s 2.0 percent target...Today’s policy statement suggests that, while the case for a policy tightening has “strengthened,” the case is still not strong enough. More evidence is needed that growth is actually sustainable and that inflation will pick up.

Macquarie's David Doyle

Our perception is that the FOMC is driven to ensure that the current long durable expansion lasts as long as possible. To accomplish this means hiking before there is a burning platform (and a clear overheating). Such an overheating would potentially lead to a more aggressive pace of hikes to curb inflation pressures, a development that in turn could elevate recession risks.

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