The Fed fails to deliver a decisive signal - Westpac

Richard Franulovic, G10 FX macro strategist at Westpac, notes that while the Fed delivered a steady policy message, markets were probably disappointed on the Central Bank not delivering a more decisive signal.

Key Quotes

The statement uses all the familiar buzzwords – the labour market continues to "strengthen", activity is "solid", risks are roughly balanced, inflation is expected to track back to 2%, growth will be “moderate” and hikes will be “gradual”.

One subtle change signals that the Fed believes we are in the vicinity of full employment and there’s not much more scope for unemployment to fall: policy is now, "supporting strong labor market conditions," instead of "supporting some further strengthening in labor market conditions," from the last statement.

The dots are mostly unchanged - a median 3 hikes in 2018, 2 in 2019 and a terminal neutral rate of 2.75%. The 2020 dots do carry the same weight as 2018 though they gravitated higher, the median projecting +37bp in Fed hikes, up from +18bp.

As widely tipped the economic projections shifted in a more optimistic direction, the median for 2018 GDP lifted to 2.5% from 2.1%, a notable increase, while 2019 was bumped to 2.1% from 2.0%. Despite continued inflation shortfalls these forecasts are completely untouched: 1.9% next year and 2% through the forecast period.

Kashkari and Evans both dissented, though neither is a voter next year.