The Federal Reserve left the Fed funds target at 0-25 bp.  It recognized continued improvement in the US economy but raised the level of concern over international developments.

In June, the FOMC statement cited “international developments” among a list of factors that uses to assess the US economy.  Now it is “monitoring developments abroad”, which it cites in contrast to the roughly balanced risks for the labor market and economic activity.    The FOMC statement explicitly cites “recent global economic and financial developments” as possible headwinds on the economy and may weigh on prices.

There is no escaping the fact the FOMC has been spooked by uncertainty raised by recent developments in China (though the FOMC statement did not specifically cite it) and the greater volatility of the capital markets.   One can debate whether the Fed is correct or not, but to understand the way these decision-makers are thinking, this is important.

From the Fed’s point of view, domestic economic considerations warrant a rate hike.   In fact, the dot plot indicates that 13 of 17 Fed officials expect that conditions will allow a hike this year.  Richmond Fed’s Lacker dissented in favor of an immediate hike.

Three Fed officials did not think it would be appropriate to raise rates this year, and one wants to wait until 2017.  This underscores an important point.  Obviously, Yellen is not the hawk that Lacker is, but she is not in the dove camp either, such as waiting until 2017.  This is Evans or Kocherlakota. Yellen is most likely one of the 76% that still see a hike this year.  That is to say the hawk/dove divide is relative, and the chair is the metric. Despite not raising rates today, Yellen is no super-dove.    That should not be lost in today’s excitement.

Looking at the dots, the Fed has effectively taken out the hike that should have been delivered today. The June FOMC dot configuration showed the median expectation for two hikes this year.  Today’s removes that, which naturally lowers the 2016 and 2017 levels as well.  The median forecast of unemployment was cut to 5.0% and 4.8% for the 2016-2018 period.  Growth is put at 2.1% this year and 2.2%-2.3% 2016-2017 and then 2% for 2018, which likely is roughly trend growth.  The inflation target is not expected to be reached until 2018.

Yellen instructs us that the median forecast should not be confused with the collective forecast. This is another way that the Fed is different than the ECB.  The ECB provides the staff’s forecast. The Fed provides all the members forecast and calculates a median from that.

While many read the FOMC statement to be dovish, we suspect that the decision not to lift rates colored the reading.  At her press conference Yellen sounds constructive, and makes it appear that today’s decision was close.   The recent developments, she says, have not changed the fundamental assessment.

The US yield curve has a bullish steepening response.  Both ends of the curve have rallied, but the short-end leads.  The dollar has sold off across the board, with emerging market currencies enjoying a recovery.  Stocks extended their earlier gains.