Fed review: rates on hold now but first hike imminent

Although the Fed decided to pass on raising rates today, the central bank remains on track for a rate hike this year. The central bank still seems to give more weight to the almost full achievement of its maximum employment objective than to the disappointments on the inflation front. 

"Today we learned the important lesson that the Fed still believes in the Phillips curve. We continue to look for the first rate hike in December, although Yellen kept the door open for October", says Nordea Research.

The Fed tends not to surprise markets, and today was no different. The FOMC decided to stand pat on policy, maintaining the target range for the fed funds rate at 0-0.25%. As widely expected, Richmond Fed President Lacker dissented for the 14th time in his FOMC career, voting for a 25 bp rate hike at today's meeting.

The FOMC continues to signal that the first rate hike in almost a decade is still likely to come this year. Out of the 17 FOMC participants 13 now see at least one rate hike this year: 7 see one hike of 25 bp in 2015, 5 see two hikes, one sees three hikes, while 3 see zero hikes before year-end and one even sees a cut. In June 2 participants did not expect lift-off until 2016. The median FOMC projection for the fed funds rate for the end of this year was today lowered by 25 bp to 0.375%, implying a target range of 0.25-0.50%, 25 bp higher than today.

If Fed Chair Yellen today suggests that a press conference is possible in October, a rate hike next month would become more likely, assuming data and financial markets warrant such a move. 

"Regardless of the exact timing of the first hike, we also stick to the view that rising inflation pressures will imply that the Fed will raise rates faster than is currently priced in by markets and suggested by the Fed's dot plot. Thus, our forecast sees the fed funds target range at 0.25-0.50% by end-2015, 1.25-1.50% by end-2016 and 2.25-2.50% by end-2017", added Nordea Research.