FOMC meeting: no rate hike for now

The Federal Open Market Committee passed on today's opportunity for a first rate hike, as widely expected. Chair Yellen first wants to see "decisive evidence" that the economy is evolving according to the Fed's baseline outlook. Yellen suggested not placing too much attention on lift-off . What should matter more is the expected path of rate hikes. For that, the Fed anticipates a gradual pace which Yellen warned not to interpret as "mechanistic". 

The Fed's central economic scenario seems to be playing out. Yellen however underlined in the press conference that the FOMC will want to see "decisive evidence" that moderate growth can be sustained. Given that data - especially labor market data - has certainly moved into the right direction but not spectacularly so, the Fed judged the conditions for a rate hike were not yet fulfilled.

As for monetary policy, the rate decision would be data-dependent. In Yellen's view, too much emphasis is being placed on the first rate hike, i.e. the timing of lift-off. The importance of the first rate hike should not be overstated since policy remains accommodative even after lift-off. What should matter more for markets, according to Yellen, is the expected policy trajectory. And for that Yellen and the Fed "absolutely do not expect a mechanical approach" to rate hikes, e.g. 25bp every meeting or every other meeting or something similar. This might be seen as a reaction to the 2004-06 rate hike cycle which was marked by fully foreseeable 25bp steps every meeting, a sub-optimal policy with the benefit of hindsight. 

The Fed expects a "gradual" rate hike cycle. For Yellen that means, for some time, a lower level of the FF target rate than the Committee views as normal in the longer run. It will however be a challenge for the Fed to keep the distance from the "mechanical" approach.

The policy of reinvesting the proceeds from maturing bonds after lift-off has not yet been decided upon by the FOMC.

By the time of the September meeting, the FOMC will have three additional employment reports under its belt; before the July meeting, only one - the June report. Therefore, in July the required "evidence" that growth and inflation evolve according to expectations will probably not yet be "decisive" enough. By September, the situation should be clear enough for the Fed. Then, the FOMC will feel certain enough to push the button for "lift-off", the first rate hike.