From Marc to Market:
The US dollar has lost another 0.5%
against most of the major currencies today, as Asia and Europe respond to the
Fed's decision. There are few exceptions to this
generalization. The Norwegian krone has gained nearly three times as
much, with the help of its central bank, which has played down for lower rates
at today's meeting. The euro is at its lowest level against Nokkie since the end of last year.
Another notable
exception is the Japanese yen. It appears to be stabilizing at
lower levels. The dollar had seen a high yesterday near JPY102.80 and a low in Asia today just above JPY100. It
is recovering in the European morning and is approaching JPY101.
The New Zealand
dollar is a third exception. The currency has seen some
profit-taking after the RBNZ also left rates on hold, but signaled its easing
cycle is not complete.
The Federal
Reserve's decision to stand pat was the most complicated in years. The case for a hike had
strengthened, Yellen said, but still the consensus to hike was not there.
Three regional Fed presidents dissented, the most in a couple of years.
In the dot plots, three (of 17) did not see a hike this year. Many
suspect that at two of those came from Governors Brainard and Tarullo.
The idea is that they may have dissented to a rate hike, and at the end
of the day, Yellen chose to keep the Board of Governors united.
The FOMC
statement reintroduced a risk assessment that it had removed in January. This
is also seen by many as a necessary precursor to a hike. Yellen
herself indicated the Fed was prepared to raise rates this year provided the
labor market continued to improve, and no
new risks emerged. Some apparently think this guidance could translate
into a November hike. We are skeptical. There is simply no
precedent for a hike so close (one week
before) to a national election. Bloomberg's calculation puts the odds of
a November hike as high as 21.4%. The CME assessment, who's methodology
we tend to share, puts the odds at 12.4%.
There were two
other important housekeeping duties the Fed appears to have completed at
yesterday's meeting. First, it has taken another step in
the process begun earlier this year of lowering the long-term Fed funds
equilibrium rate. It now stands at 2.9%, down from 3% in June and 4% a
year ago. Second, it reduced what it sees as the long-term growth
potential to 1.8% from 2%. There is some risk that the long-term potential growth is revised lower again, as the
weakness in productivity growth acts as a drag....MORE
