The FOMC statement was slightly more hawkish than we had expected in that the previous statement that “global economic and financial developments continue to pose risks “ was deleted, which presumably reflects the better tone of Chinese data recently, and the softer dollar. However, they added that they are closely monitoring global economic and financial developments, which seems to suggest they are not sure the good news is set to last. Removing the reference to global risks is also probably an attempt to keep the overall balance of the statement more or less where it was, because the domestically-focused part of the current assessment was more dovish than six weeks ago.
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– The market’s pricing of the probability of a rate hike in June was broadly unchanged. According to Bloomberg the market- implied probability of a June hike is currently 23.0%, up mildly from the 21.6% prior to the release of the statement. December’s odds are now 67.2%, up from 66.1%.
– Our view is that the Fed acknowledged the recent disappointment in the data, though focusing on the bright spot – employment. Moreover, the taking out of risks is likely a reflection of both an easing in financial conditions as well as better data out of China.
– Importantly, the Fed did not signal an impending rate hike – as it did in its October FOMC statement ahead of the inaugural rate hike at its December FOMC meeting.
We continue to think that near-term momentum in economic activity and uncertainty will keep the Fed on hold for some time. In our view, the Fed is likely to keep rates on hold throughout 2016 and 2017.