September FOMC - Analysts react

"The second surprise was that a number of the longer-run dots fell such that, now, 9 of 15 participants think the longer-run policy rate is below 3.00%. In fact,5 of 15 now think the longer-run policy rate is at 2.5% or lower. Contrast this with the June dot-plot where only 6 of 15 participants saw the longer-run policy rate below 3.00%. This wholesale revision lower to the longer-run dots is the reason the 2s30s yield curve flattened so much in the wake of the headlines." - Morgan Stanley

"The longer term dot median moved lower by 25bp to 2.75%, which is significant. It indicates concern that the neutral rate is unlikely to pick up, and limits the selloff in the front end. [...] The market reaction after the FOMC meeting validated our expectation that the front end would sell off despite lower dots (see US Rates Weekly: Taper Time!). However, as we highlighted above, we think that the overall message from the Fed is not hawkish, and we see a pause in the selloff here. We therefore took off our short position in EDH9 that we initiated on Sep 7." - Jabaz Mathai, Citi

"We see the Fed's actions as somewhat contradictory for rates, since the Fed tightened (with QE exit and maintaining a hike in 2017) and eased (by lowering the longer-term dots) at the same meeting. [...] FX view: The lack of any shift in the Fed “dots” for 2017 and 2018 prompted a sizeable knee-jerk rally in the USD, later supported by Chair Yellen’s comments The market reaction to the September FOMC is a further challenge to the consensus which had been scrambling to revise EUR-USD forecasts higher having first failed to call the move to 1.20." - HSBC

"The near-term message from the FOMC was hawkish, with 12 out of 16 participants projecting a third 2017 rate hike, upgrades to the GDP and employment forecasts, and continued skepticism from Chair Yellen about the significance of the weaker-than-expected core inflation numbers. We have consequently upgraded our subjective probability of a rate hike in December from 60% to 75%. [...] By contrast, the longer-term interest rate projections (2019 and beyond) surprised on the dovish side." - Jan Hatzius Goldman Sachs

"While the Fed remains on course, we still have our doubts about the third rate hike. Note that the minutes of the previous meeting, in July, revealed a fierce debate about the inflation outlook. At the press conference, Fed Chair Yellen was not able to offer a good explanation for low inflation this year. We expect core inflation to continue to fall short, which should induce the FOMC to delay the next hike to next year. Note that retiring Vice Chairman Fischer – who would be inclined to vote for a hike – will no longer be a voter at the next two meetings." - Philip Marey, Rabobank

"Beyond this alteration on energy prices, the committee made no significant edits to its assessment about current or future inflation. We await the chair’s press conference to ascertain the degree to which members are concerned that recent disinflation is more permanent than transitory." - Barclays Research

"The real focus is on how the markets will react over the longer term to policy normalisation. [...] Today's chart continues to suggest that the Fed will press ahead with one more quarter-point interest rate hike by the end of the year and three further quarter point hikes in 2018. [...] However, structural issues - namely still high global debt, an ageing global population and rising inequality - should help to keep a lid on yields and so support bond prices. In addition, US financials such as banks also stand to benefit from higher rates, as they will see a boost to their lending margins." - Tom Stevenson, investment director for personal investing at Fidelity International

"We had suspected that the recent softness of core inflation could persuade officials to hold off on the next rate hike until next year but, given these latest projections and the broadly unchanged language on inflation in today’s policy statement, we now expect the Fed to push on and raise rates again in December. By early next year, core inflation should be trending higher once more and, along with the possibility of a fiscal stimulus, we expect this to persuade the Fed to hike rates four times over 2018 as a whole, a slightly faster pace of tightening than officials currently project." - Andrew Hunter, Capital Economics

"The statement and dots confirm our view that while the four most dovish members (probably Bullard, Brainard, Evans and Kashkari, in our view) are still concerned about low inflation and do not think it is appropriate to raise rates further this year, core FOMC members still believe that above-trend growth and a tighter labour market will lead to higher wage growth and hence inflation eventually." - Danske Bank