Key to markets is the wording around the risks to the outlook which is usually found in the second paragraph. Back in March, the Fed suggested that “global economic and financial development continue to pose risks” while not giving an explicit assessment of the balance of those risks. Chinese growth concerns and the tightening seen in financial conditions earlier in the year were reasons for the March dovishness. Since then, however, fears about China have abated and financial conditions are now the most accommodative since before the market selloff last August.
As such, it was nice to see that the Fed did not completely change the goalposts in the statement today. But instead of explicitly saying that risks were “broadly balanced” as we had speculated the Fed removed the reference to global events posing risks altogether. While perhaps somewhat confusing, to us it was a pretty clever way of leaving the door ajar to hikes in the near term albeit probably not in June already given the Brexit referendum a week later.
Our forecast still is for a September hike but based on current communication it is fair to say that any meeting is live. As a reference right before the release, the probability of a hike in June, September and December were 21.6, 49.4 and 66.1% respectively.
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