FOMC: Something For Everyone, Not Enough For Anyone

Heading into today’s highly-anticipated FOMC meeting, we highlighted three major areas of focus in our preview report. With 2.5 of the key elements now revealed, the message is thoroughly mixed.

As everyone in the trading world expected, the Federal Reserve left its main Fed Funds rate unchanged in the 0.00-0.25% range, but as ever, the market is looking ahead to the future. On that front, the central bank’s outlook remains as data-dependent and open-ended (some would say intentionally obfuscated) as ever. The central bank’s widely-watched “dot chart” of expected interest rates shifted lower on the whole, though the median year-end 2015 expected fed funds rate just barely held in at the 0.625% level, indicating two expected rate hikes this year. While the central bank’s near-term outlook for interest rates is essentially unchanged, the median year-end 2016 and 2017 forecasts each shifted down by 0.25% to 1.625% and 2.875%, respectively. It’s worth noting that this is still well above the market’s expectations of 1.375% and 2.125% respectively, as shown by the current pricing of Eurodollar futures contracts.

As expected the Fed also revised down its expectations for 2015 economic growth after the sluggish start to the year, but the central bank also surprised traders by ticking its expected year-end unemployment rate forecast up to a range of 5.2-5.3% (from 5.0-5.2% previously). Inflation expectations were effectively unchanged across the board.

Meanwhile, one other potentially dollar-bullish catalyst failed to come in: the decision to hold interest rates steady was unanimous for the fourth consecutive meeting. Some traders had thought that a more hawkish member of the Fed (Jeffery Lacker?) would dissent in favor of raising interest rates immediately, but each committee member stuck to the party line. Perhaps as a result of this unanimity, the implied rate of a September rate hike from the Federal Reserve has edged down to 22% from 28% before the meeting.

This “a little something for everyone, but not enough for anyone” release will prolong the recent environment of sharp (over)reactions to US economic reports over the next few months and sets the stage for a potentially hotly-contested FOMC meeting in September. The upshot for traders is more short-term volatility through the historically slower summer months, regardless of the market.

As we go to press, Fed Chair Janet Yellen is in the midst of her press conference and appears to be striking a relatively neutral tone.

Market Reaction

The market reaction to the less-hawkish-than-anticipated release has been mild, but definitively dollar-negative. EUR/USD has edged back up toward 1.1300, GBP/USD briefly tested its year-to-date high around 1.5800 and USD/JPY is ticking back below the 124.00 level. Meanwhile, US equities were volatile, initially dropping, then rally up to new daily highs as of writing. Perhaps most importantly, the benchmark 10-year treasury yield has come off the daily highs, though like most other markets, the post-FOMC moves have merely unwound the morning’s speculation of a more-hawkish statement…a classic “buy the rumor, sell the news” outcome thus far.

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