Not much to say here following the latest Fed statement. They dropped “considerable time” and added that they will remain “patient”. I don’t even know what that means, but the parsing of words here is a bit overdone in my opinion. The key point at present is not in the statement’s specific terminology, but the broader macro events. And at present the Federal Reserve and other Central Banks are seeing a few things:
- Very tepid global growth & declining growth in many international markets.
- High risk of deflation in Europe.
- Growing risk of contagion from the collapse in oil prices and the Russian economy.
- Low wage growth and downside risks increasing in the US economy.
- Increasing risk of banking system defaults due to oil and foreign exposure.
- An economy that is still healing from the impact of the financial crisis.
Given all of this there is simply no way that Central Banks can consider tightening. Frankly, I am shocked by how shocked people are about this report. This announcement was a total no-brainer given recent events. So, the bottom line is:
- The Fed is on hold at least until Q3 next year.
- In Q4 2015 and Q1 2016 the inflation comps will get rather low which will make the Fed much more skittish.
- I still think there is a high risk that we will be at 0% interest rates when we enter the next recession.
- Therefore, QE is the likely policy tool of choice. Any dovish statement should be interpreted as a move towards an increasing probability of balance sheet expansion.