The content of the U.S. Federal Reserve statement and not its decision to leave its key interest rate at 5.25%, has once again proven to be the real focus of its recent meeting. The statement, which was less dovish than some had hoped, may lead the market to lower its expectation for upcoming rate cuts.
“While we do agree that a cut in the Fed Funds rate is more likely at this point than an increase in rates, we think the most likely outcome is that the Fed leaves rates on hold through the remainder of the year,” TD Securities economics strategist Jacqui Douglas said in a note to clients.
In comparing the Fed’s statement on Tuesday with its June 28 predecessor, the statements on inflation are identical, demonstrating that it remains concerned that inflation could pick back up, according to strategists at Scotia Capital.
In terms of growth, the Fed continues to see moderate expansion in coming quarters, adding it will be “supported by solid growth in employment and incomes and a robust global economy.”
This may be an attempt to reassure the market, the strategists said in a note.
Finally, while the Fed acknowledged the negative impact the subprime situation and tightening credit could do to the economy, it did not alter its “predominant policy concern.” This “risked encouraging the market to price in rate cuts even more aggressively than they already are,” Scotia strategists said, adding that the implied odds of a rate cut in October were more than 80% on Tuesday morning.