On the September FOMC and BOJ
As we expected, no rate hike. But “roughly balanced” risks and three hawkish dissents set the stage for a December hike. This is inexplicable to us considering that the “longer run” estimates of the “neutral rate” continue to come down sharply, and that market-implied long-term inflation expectations are at or near the lowest in the history of the data. Normatively, the Fed should do nothing in December – and election-driven volatility will probably make that so. But without a risk-off environment between now and then, positively, we have to admit a hike seems likely.
The BOJ announced an overt policy of inflation-overshoot, and “yield curve control” pegging the 10-year at 0.0%. Overnight rates, which act now only as a tax on banks, were not made even lower, so bank stocks rallied. The yen strengthened, but this is a not a clear signal of failure of these new policies. Since 2014 the yen has been a passive function of USD, which itself has been a passive function of the oil price.