September FOMC: Rate hike not now, but when?

The committee upgraded its assessment of economic activity, in line with the stronger pace of incoming data. It described economic activity as having expanding at a moderate pace. The FOMC sees a range of labor market indicators as suggesting that labor market slack continues to diminish, with solid job gains and declining unemployment. They view household spending and investment as having improved somewhat. The committee continues to see net exports as soft. They also noted the risks from recent global economic and financial developments, stating that these factors may restrain economic activity somewhat and are likely to put further downward pressure on inflation.

The majority of participants continue to expect at least one rate hike this year. In addition to the negative rate expectation, three other participants project an end-2015 funds rate of 0-25bp, while six members expect two or more rate hikes this year. Elsewhere in the SEP, there was a decline in the FOMC members' estimate of NAIRU, which they moved down to 4.9-5.2%, compared with 5.0-5.2% in June. Members sharply lowered their estimate of long-run GDP growth to 1.8-2.2%, compared with 2.0-2.3% in June. Longer-run inflation expectations were unchanged relative to June; their expectation for 2016 is slightly lower. 

"We expect the FOMC to signal a December lift-off, and the dots are one way to show conviction about lift-off this year. Although we see the statement as slightly more dovish than expected, we believe the majority of participants expect to hike rates this year. That said, we stand by our call for a March lift-off, as we continue to believe that the weak profile of inflation early next year will eventually push the FOMC out of 2015", notes Barclays.