Fed: No rate hikes just yet, but not far away

As broadly anticipated, the Federal Open Market Committee (FOMC) left the federal funds rate unchanged at a range of 0 to ¼ percentage point today. It also maintained its policy of reinvesting principle payments on its holdings of MBS and agency debt and rolling over maturing Treasury securities on its balance sheet.

The statement's assessment of the economic outlook was slightly more upbeat, noting that "activity has been expanding moderately," that "job gains picked up," and that "underutilization of labor resources has diminished somewhat."  Besides a reference to energy prices stabilizing, the rest of the statement was unchanged from its April rendition.

The summary of economic projections lowered the outlook for real 2015 GDP growth to a central range of 1.8 to 2.0 (from 2.3 to 2.7), but raised the outlook for 2016 and 2017 slightly (to 2.4 to 2.7 and 2.1 to 2.5 respectively), with the bottom end of the central tendency edging up a tenth of a percentage point for both years.

Inflation and unemployment projections were tweaked slightly. Unemployment projections edged higher in 2015 with the bottom end of the central tendency rising to 5.2 (from 5.0 previously), while the top end remained unchanged at 5.3. PCE inflation meanwhile, remained unchanged in 2015 (0.6 to 0.8), but fell slightly in 2016 (to a central tendency of 1.6 to 1.9).

The so-called "dot-plot" showing FOMC member's expectations for future policy rates coalesced around a median of 0.625 in 2015, as the outliers at the top end of the scale moved lower. The median projection for 2016 moved down to 1.625 from 1.875 in March and the median projection for 2017 also fell to 2.875 from 3.125. The long-term remained unchanged at 3.75.

Despite the recent upturn in economic data, the weakness early in the year was enough to push the Fed away from a June rate hike. This has long been the view and there was little surprise coming from today's statement. The lack of any explicit guidance concerning an upcoming rate hike will disappoint those in the market hoping for a hint of things to come. On this, we may learn more during Yellen's press conference following the release of the statement.

The Fed's median projection for the fed funds rate at the end of 2015 continues to be for two rate hikes before the end of this year. This puts a September rate hike firmly on the table, and places the market still slightly at odds with the median Fed participant. Nonetheless, the Fed has come closer to the market in its expectations for 2016 and 2017, reducing the potential for surprise going forward.

There was little in the economic projections to change the broad assessment of the economic recovery going forward. The downward revisions simply account for weakness early in the year. Some of this may be revised away as more data comes in, and it would not be surprising to see the near term projections adjusted back upward next time.