Markets Post-FOMC: Views From Major Banks

"Danske (out of consensus): We Stick To Our Call For No Fed Hikes This Year

Although the more hawkish statement puts pressure on our Fed call, we stick to our view that the Fed will not hike this year, especially as we think the Fed may be too optimistic about the current economic situation given the weakness in ISM and retail sales, but it is a close call. We have outlined our view in Presentation US: 10 reasons why we believe the Fed will not hike this year, 14 September. However, incoming data will be analysed thoroughly in coming months and we may see markets react more to positive/negative data surprises. Also, in our view, one should not be fooled about the Fed's eagerness to hike as the Fed has communicated an upcoming rate hike the whole year. We still think most voting FOMC members have a dovish-to-neutral stance on monetary policy and when it comes right down to it they would rather postpone the second hike than hike prematurely. It is also worth noting that three voting hawks (George, Mester, Rosengren) all lose their voting rights next year. Markets have priced a 60% probability of a hike by year-end.

Credit Agricole: Fed To Hike In December

The FOMC, as widely expected, opted for unchanged policy at its September meeting with the Fed funds target range maintained at 0.25% to 0.50%. Market participants saw a relatively low probability for a rate hike with policymakers split over the near-term rate normalization path. We look for the FOMC to hike the Fed funds rate by 25 bps on 14- December. Chair Yellen's comment that the case for a rate hike has strengthened was echoed in the statement. Moreover, the FOMC noted that the "near-term risks to the economic outlook appear roughly balanced.". The FOMC wants to "wait for further evidence of continued progress toward its objectives." We expect real GDP growth to average over 2.5% in the second half of the year. As more evidence accumulates that the economy continues to grow above its potential rate and labor markets strengthen further with a likely acceleration in wage growth, we believe that the cautious members of the FOMC will feel more confident about meeting their policy objectives and raise rates. The FOMC continues to expect that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate. The Fed's updated dot plot put the median Fed funds projection for yearend 2016 at 0.625% and the projected rate hikes for 2017 were trimmed to 2 from 3. The longer run rate was moved down to 2.875%.

CIBC: Fed To Hike In December.

A string of weak data releases in the lead up to today's announcement likely removed any chance of a Fed rate hike. So it comes as no surprise then that the FOMC decided to keep interest rates unchanged at their September meeting. That said, with three officials dissenting, it appears that odds are starting to tilt in favour of a rate hike. The assessment of the economy contained in the statement appears to be little changed from the previous one and a sentence indicating that the case for a rate increase has strengthened was added. Together, those factors suggest that the recent spate of soft economic releases are likely viewed as more transitory than not. 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. Overall, while the statement and dissents were more hawkish than expected, the dovishness contained in the SEP appear to be driving markets

Barclays: The committee More Split Than It Has Been At Any Time In Our Memory

Although we had expected a interest rate hike at this meeting, 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.

SEB: The Fed Paving The Way For December Hike

As expected the Fed decided to hold the target range for the federal funds rate unchanged at the policy meeting that concluded today. Disappointing economic data notwithstanding, the no-hike decision came with a hawkish twist as policymakers strongly suggested that rates will be lifted before long. While the case for a rate increase had strengthened according to the statement, the committee decided for the time being to wait for further evidence of continued progress towards its objectives. Every word is there for a reason and "for the time being" is clearly suggesting that the rate hike is close. The balance of risk assessment made a comeback too; near-term risks to the outlook now appear roughly balanced thus also paving the way for a 2016 hike. In addition to that, the new forecasts show a 2016 hike so all of the above is suggesting that the December meeting is in the spotlight. Not only is the election will be out of the way by then but the as opposed to November the December meeting has a press conference attached to it. The committee was unusually split with George, Mester and Rosengren dissenting in favor of a hike while three officials see no rate hike in 2016. What the latter is suggesting, however, is that a huge majority is expecting a 2016 hike since 17 officials submitted forecasts. As an aside, if memory serves us correctly not too long ago Rosegren was a dovish dissenter.

Nordea: Hawkish Signal For December

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 on 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.

ANZ: Positive For Risky Assets

The FOMC left interest rates unchanged as expected, but signalled that one increase in the Fed funds rate was likely by December. Three voters dissented on the decision to hold rates. Owing to weak growth in the first half of this year, the 2016 GDP forecast was cut to 1.8% and the FOMC now anticipates two hikes in 2017. The gradual approach to raising interest rates and prospect of only modest rises in the future against the backdrop of moderate growth and well contained inflation continues to provide a positive framework for risky assets. Accompanied by exceptionally loose monetary policy in other developed economies, Asia/Pacific markets should continue to be attractive to overseas investors especially given the improving growth backdrop in the region.

BofA Merrill: Fed Signals December Hike; Limited USD Downside

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. USD: What's Next? The dollar was mixed in the wake of the FOMC statement. Cross-currents in the statement between three voters dissenting in favor of hikes combined risks to the outlook now being seen as nearly balanced were offset by downward revisions to the 2016-2018 dot plots. On balance, as we expected, today's meeting set the stage for a December hike, which will keep the USD supported (and downside limited)".

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