After yet another two-day Federal Open Market Committee meeting, the Federal Reserve has again opted to leave interest rates unchanged, compared with earlier expectations for four hikes in 2016.
In digesting the Fed's July press release, my initial view is that it was stitched together from previous ones because, by and large, the commentary was very much the same as we've seen over the last few months. Words like "moderate," "some increase," "run below," "remain low," and "little changed in recent months" tell me that despite the very recent improvement in domestic economic data (which has led to an increase in the Citi Economic Surprise Index), the Fed is both looking for more data confirmation for the economy while watching what is happening outside the U.S.
There are still ample unanswered questions regarding the implementation and impact of Brexit, as well as other issues, including the U.K.'s July drop into economic contraction territory, continued weakness in the Chinese and Japanese economies and Friday's Italian bank stress tests. From what my colleague Lenore Hawkins is seeing with her proximity to economic problems in Italy, there is little indication that some sort of solution for the troubled banks is in the works, which could mean market fireworks in the near future.
In addition, commentary during the current earnings season from companies ranging from Caterpillar (CAT) to Honeywell (HON) , as well as industry data from the trucking and rail industries, continues to paint a tepid global economic picture. In terms of risk vs. reward, the Fed opted to err on the side of easy monetary policy lest it choke the burgeoning flame of the domestic economy.
The market's reaction was pretty much a loud and resounding "meh" on the Fed news, which tells us this is what everyone expected. The fact that there was no scheduled press conference following the decision was a likely tip-off. We doubt the Fed would act without explaining its reasons for doing so.
With the next FOMC scheduled for Sept. 20-21, we are again in data-dependent mode when it comes to monitoring the economy and speculating on Fed timing. The fact that it is an election year, and a contentious one at that, paired with little business investment occurring (no surprise again because it is an election year), odds are the economy will remain on the same flight path. In other words, 2% to 2.5% GDP growth in the back half of 2016 could lead some folks to further revisit earnings expectations for the back half of 2016.