As expected, the FOMC opted to leave adminstered rates unchanged today, but raised the likelihood of hike in December. The statement said the case for removing policy accommodation had strengthened, and three participants dissented in favor of a rate hike today. FRB Kansas City's George dissented at previous meetings this year, while FRB Cleveland's Mester was a named risk for dissenting. The surprise is FRB Boston's Rosengren, an erstwhile dove, who has more recently come out with alarms over a commercial real estate bubble.
Turning to the dot plot, FOMC participants' assessments of appropriate (i.e., the midpoint of the target range or target level for the federal funds rate) show ten members favor a 25-bp rate hike between now and the end of the year. While the market's inclination is to shift all the probabilities into the December fed funds contract, the Fed has a binary option to hike at the November 1-2 meeting or the December 12-14 meeting.
For 2017, the median dot fell to 1.125%, signifying three rate hikes between now and the end of next year. At the June meeting, the median was 1.625% (five hikes). The 2018 median dot was 1.875% (six cumulative hikes), down from 2.375% (eight hikes) at the June meeting.
In the Summary of Economic Projections, the median projection for the change in real GDP for 2016 fell to 1.8% (from 2.0% in the June SEP), while the median projection for the unemployment rate rose to 4.8% (from 4.7% in the June SEP). The core PCE projection cooled to 1.3% (from 1.4%), whereas the core PCE projection was unchanged at 1.7%. Compared to the June SEP, the 2018 medians were unchanged for the change in real GDP (2.0%), PCE (2.0%) and core PCE (2.0%), but down 0.1-pp for the unemployment rate (4.5%).
The statement and supplementary materials signal a hawkish hold, defering the rate hike until after the election and awaing the arrival of incoming data on employment and . As before this meeting, we are highly confident in a December rate hike of 25 bps .
We have opened EUR/USD long at market price (1.1180).
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