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Review of September Fed meeting

In a decision that was not unanimous, the Federal Reserve (“the Fed”) today elected to maintain the target Fed Funds rate at the same zero to 0.25 range in which it has been held since late 2008. The members decided not to raise the rate due to concerns about “recent global economic and financial developments that may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” and also noted that they are “monitoring developments abroad.” They also expressed a desire to see “further improvement” in the labor market before beginning the rate hike cycle. The bottom line appears to be that the Fed is concerned about the potential for deflationary pressures to be imported to the U.S. from other parts of the world, which would be exacerbated by the strong U.S. dollar and weak oil prices, leading to further U.S. deflation.

Based on the rate outlook produced by Fed members, it seems that most still want to begin raising interest rates by the end of this year. Their interest rate projections show that 13 of 17 policy makers see higher rates by the end of 2015. As a result, it looks like the Fed skipped the rate increase today only to immediately put it back on the table for the next meeting. However, the Fed did lower its forecast for how quickly and how high the rate will rise in the coming years.

Richmond Fed President Jeffrey Lacker’s dissent breaks a stretch of five straight unanimous votes for the Federal Open Market Committee (“FOMC”), reaching back to January. Clearly the decision was hotly debated amongst the voting members and will be presented for discussion again at Fed meetings in October and December.

The pace of rate increases, and the absolute level of the Fed Funds rate, is ultimately more important than the date of the initial hike. But, today’s decision further extends the uncertainty that investors have been dealing with for several months. We believe at some point in the near future the rate hike cycle needs to begin in order for the Fed to retain its credibility with the markets and to remind investors that rates cannot stay at zero forever.

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