The Federal Reserve met market expectations fully.  It upgraded its assessment of the economy, recognized that the near-term risks had diminished, and remained committed to normalizing monetary policy.    There was one dissent from the steady stance, and it the KC Fed President had already tipped her hand.

There was little direct guidance about the September meeting or whether most Fed officials still saw two hikes this year, as they seemed to last month.  This is not particularly surprising, and reading between the lines, a single hike this year is the most likely scenario.

Besides upgrading the economic assessment and George’s dissent, there was only one major change in the statement, and that was a single sentence:  “Near-term risks to the economic outlook have diminished.”  This statement and the re-introduction of a risk assessment is understood by many participants as necessary step before resuming the normalization process.

After today, there are three meetings left for this year, September, November, and December. The November meeting is too close to the elections for the Fed to move.  This judgment is made by examining the modern history of the conduct of Fed policy.   However, the Fed has moved in September of presidential election year, and as we know from last year too, year-end considerations do not prevent a move in December.

There has been a clear pattern of the US economy in recent years.  A weak Q1 is followed by a stronger Q2.  This is being played out again this year.  The economic performance in Q3 is critical.  The NY Fed’s GDPNow tracker projects faster growth in Q3 than in Q2, but these kind of models are volatile.

The September meeting is late in the month.  Fed officials will see two more employment reports and more cyclical data before they meet again.  Yellen will speak this year at the KC Fed’s gathering in Jackson Hole at the end of August. Intended or not that speech will help shape market expectations for the September and possibly, the December meetings.  The market is more inclined to see a December hike than September.  By our calculation, the market is discounting about a 75% chance of a hike at the end of the year.

The US dollar initially rose in response to the statement but quickly reversed.  US coupon yields eased.   Stocks recouped their earlier losses.