Whatever your anticipations may have been, that has to be one of the dullest Fed meeting ever… In other words, hawks and doves may be equally disappointed and/or plain disoriented on that one!
The main points of (dis?)interest are as follows:
Ø “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 continued progress toward its objectives” even though three members were in favor of a hike (a quite unusual level of dissent actually)
Ø “ Near term risks to the economic outlook appear roughly balanced”
Ø Downgrading of 2016 forecasts for both growth (from 2% to 1.8%) and inflation (from 1.4% to 1.3%)
Ø “Investment spending has been quite weak for some time”
Ø “PCE inflation still short of 2% objective”
Ø New dot plot implies a 25bps hike in 2016 and two hikes in 2017 (against three previously). Also note more dispersion in the dot-plot
Ø More interestingly possibly, no meaningful mention was made of international developments
In a nutshell, the message is that, first, rates should be hiked by 25bps (no less but no more) in December and, second, that, even though dissenters are clearly gaining clout within the FOMC, the pace of liftoff will remain as cautious as can be… Should be rather good news for risk assets overall IN THE VERY SHORT TERM; and in that regard the fact that Janet Yellen said that “asset values are not out of line with historical norms” may not be purely coincidental!
In the longer run, though, the question any investor should ask oneself at this stage is: if hiking rates by 25bps to 0.75% is sooo challenging, what is the real UNDERLYING health of the U.S. economy?... Also, those, including ourselves, who anticipated meaningful curve steepening ahead may have to tone down their expectations a bit now. Therefore expect to see sellers on bounces on financials before too long.
But, meanwhile, indebted and leveraged sectors, commodity stocks in general and oil-related assets in particular (plus, and that is not a paradox, the most “boring” stocks) should logically see some kind of relief-buying, at least in the short term then again. We therefore maintain our overall “buy on dips” stance while clearly tweaking the sector bias as outlined above.
Finally, if we try to take a bit more distance with short term market vagaries, it is interesting to note that Janet Yellen said at one stage: “I do have concerns for the scope of monetary policy”. Well, we do share that concern; maybe not for the same reasons though…