Coming into today, the market consensus was that the Federal Reserve would not touch interest rates due to a recent swath of weak housing data, European risks, low inflation, and a general cooling in recent economic data. The feeling that the Fed wouldn’t move on rates could be seen in the federal funds futures markets leading up to today, where the probability of the Fed raising rates this year has been dropping like a stone lately. On that front, the Fed didn’t disappoint – they left interest rates unchanged at their current rock-bottom level of 0 – 0.25%.
Since the market was already convinced that rates weren’t moving, the intrigue surrounding today’s meeting was more about whether there would be material changes in the language of their statement. Fed statements are routinely parsed by market participants, sometimes to the point where half the battle of reading the statement is to make sure you don’t end up reading too much into any one line.
Today’s statement appeared to sum up conditions quite well. My read is that they are essentially saying that the economy is still growing, but it is challenged with many strains, most recently in financial conditions. There was nothing particularly bullish about the statement, like mentioning that they would resume monetizing (purchasing) mortgages or other debt. But on the other hand, there were no negative surprises either, like if they had hinted that a rate hike is on the way, even in the face of growth coming off the boil.
All in all I think it was in line with expectations, with no real surprises. Perhaps a more important issue regarding the Fed is that they are running out of bullets in their policy toolkit. But I’ll leave that topic for a separate blog post.
