Not Yet. As it was widely expected, the US Federal Reserve decided to remain on hold in its September meeting as concerns about an increasingly weak global economy overshadowed evidence of a resilient US recovery. The vote to keep the federal funds rate on hold was 9-1, with only Richmond Fed Jeffrey Lacker dissenting.

A hike before year end likely. The Fed maintained its record low of 0-0.25% target range or ZIRP, ending weeks of feverish speculation over whether it would raise rates for the first time since before the global financial crisis. Meanwhile, on the future expectation of rate decision the average of the "dots" shows a year-end Fed Funds rate of about 0.40%, suggesting rate hikes are coming in both October and December meetings or either the two meetings. Only 4 out of 20 members aren't projecting a rate hike this year.

External worries. In the statement, the Federal Open Market Committee (FOMC) expressed concerned about China and emerging markets, and also about dollar's strength. It takes note of "soft" exports, and inflation continuing to run below target. Fed Chairman Janet Yellen began her statement saying that the labor market conditions have continued to improve, but inflation, has continued to run below their longer-run objective, partly reflecting lower energy prices. Also, she said that the recent global economic and financial developments are likely to put further downward pressure on inflation in the near term, and therefore "these developments may also restrain U.S. activities somewhat."

Dovish undertones. Overall, it was a quite dovish statement in view of the fact that it made no mention to a probable rate hike over the upcoming months. Nevertheless, Yellen also noted that most participants continue to think that economic conditions will call for or make appropriate an increase in the Federal funds rate by the end of this year. But inflation expectations still remain low at around 1.2% (see Graph 4) while employment data has seen some improvement. The Fed lifted its economic forecast for 2015 on the back of this year’s steady activity numbers, penciling in a median 2.1% growth, up from 1.9% cent previously.

Source: Kenanga Research - 18 Sep 2015