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Here's What Wall Street Is Saying About the Divided Fed

Here's what Wall Street had to say about the Fed's decision, policy makers' assessment of the U.S. economy, Yellen's press conference, and the divide that's entrenching inside the central bank. The interpretations, taken from analysts' notes, represent as diverse a spread of opinions as those of the Fed officials they're commenting on.

Scotiabank's Derek Holt

The overall statement may be setting up another dovish hike in December, just like last December’s move, but at this point that’s a binary bet contingent in part upon the flow of data and market developments but also — regardless of what they say publicly — the outcome of the U.S. election on November 8th. That is not a question of partisan politics. It is common sense when the range of policy options is so wide and in some cases — like trade policy — so potentially damaging to the outlook.

Barclays's Michael Gapen and Rob Martin

The non-hike was very close call. The language in the statement suggests that the committee was quite undecided in its view. More clearly, with three members dissenting against the decision and three, presumably different, members calling for no further rate hikes this year, the committee is more split than it has been at any time in our memory. This split in views will make FOMC communication and action increasingly difficult this year. In particular, we believe that this level of dissent will make it difficult for the committee to keep the possibility of December rate hike live in the minds of market participants and, indeed, households and businesses.

Bank of America Merrill Lynch's Michelle Meyer

The FOMC clearly signaled a hike before the end of the year in both the language and the dots. The Fed made two important changes to the statement. First, the committee noted that near-term risks to the economic outlook "appear roughly balanced". This is an important step for the Fed to justify hiking rates at an upcoming meeting and is a page out of the playbook from last year. We expected the Fed to make this language change.

Second, the FOMC noted that "the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of further progress toward its objectives." This is a strong signal that the Fed is planning to hike in an upcoming meeting. It is not explicit calendar guidance, but it is a small step in that direction.

Morgan Stanley's Ellen Zentner

This is a Committee that would like to deliver a hike this year if at all possible. Justifying a hike this year will not be easy. The incoming data, contrary to Yellen's assessment, paints the picture of declining momentum and suggests 4Q16 will be sluggish. At the same time there is no evidence the economy is overheating, slack remains, and the path to a lower neutral will also be shallower.

CIBC World Markets's Royce Mendes

While the statement and dissenters argue for more near-term hawkishness from the central bank than had been expected, the SEP favours a longer-term dovish view of the economy. The median of members now only sees two rate hikes next year, while the forecast for the longer-run neutral rate came down a tick to 2.9%. We continue to view December as the most likely timing for the next rate hike, although that's contingent on a rebound in economic data.

Bank of Montreal's Michael Gregory

The FOMC included a net risk assessment for the first time this year: “Near-term risks to the economic outlook appear roughly balanced.” This is similar to the language used before December’s liftoff (“nearly balanced” back then). And, to top it off, Cleveland’s Mester and Boston’s Rosengren joined Kansas City’s George in dissenting in favor of a rate hike today. The last time three dissenters went the same way was in September 2011 (and it was a hawkish dissent that time too).

Nordea Markets's Johnny Bo Jakobsen

Today’s FOMC statement and the new dot plot reinforce our expectation that the Fed will hike rates again in December. We continue to believe that a Fed move at the next FOMC meeting in early November is rather unlikely, just one week ahead of the presidential election on 8 November. The renewed downward revision of the Fed’s estimate of the neutral rate adds to the downside risks surrounding our forecast of 3 Fed rates hikes in 2017.

JPMorgan Chase & Co.'s Michael Feroli

The statement noted risks to the outlook were “roughly balanced,” but more surprising was the addition of the phrase that the case for a hike has strengthened, but that the Committee decided “for the time being, to wait for further evidence of continued progress toward its objective.” The phrase “for the time being” is obviously somewhat ambiguous; a case could be made that this points to November, thought we still think the odds for a hike at that meeting remain well below 50 percent.

Citigroup's William Lee

Chair Yellen said that the Committee delayed raising rates at this meeting, in part, because inflation was low and the FOMC believed that labor market slack continued to be absorbed relatively slowly. This reduced the urgency for an immediate rate hike. Moreover, the Committee perceived risks to be asymmetric when policy rates are near zero, so that it would be prudent to keep rates lower for longer, rather than risk the downside consequences of a premature increase.

Credit Suisse's Jeremy Schwartz

This meeting reaffirms our view that the Fed is increasingly timid about raising rates and sees little downside to a cautious approach. In the press conference, Yellen noted that the Committee is “not seeing evidence that the economy is overheating,” and “there appears little risk of falling behind the curve.” Overall, we still expect the Fed will not hike rates until May of next year.

Oil prices fell on Friday

Oil prices fell on Friday, pulled down by a sell-off following two sessions of strong rises and on caution ahead of a gathering of OPEC ministers next week in Algeria to discuss possible production cooperation to rein in global oversupply.

U.S. West Texas Intermediate (WTI) crude oil futures CLc1 were trading at $45.98 per barrel at 0648 GMT (2:48 am ET), down 34 cents, or 0.7 percent, from their previous close.

Reference: Bloomberg, Reuters