Updated: 08-16-2018

The message of the policy directive from the Federal Open Market Committee (FOMC) meeting may not have been direct, yet it still made it clear that the FOMC is on course to raise the target range for the fed funds rate at its September meeting.

That inference can be drawn from the first paragraph which (a) upgraded economic activity to rising at a strong rate (b) described household spending and business fixed investment as having grown strongly and (c) regurgitated the understanding that both overall inflation and inflation for items other than food and energy remain near 2 percent.

Importantly, the directive made no mention of protectionist trade measures creating a headwind for growth or posing a downside risk for the economy. They could of course if things blow up, but for now, they have not risen to a level apparently that warranted any specific mention in the directive.

So, then, why didn't the FOMC just raise the target range for the fed funds today? The answer is because it didn't want to shock the market.

The fed funds futures market assigned only a 1.8% probability to a rate hike at today's meeting, whereas, the probability of a rate hike at the September meeting stands at 91.0%.

Furthermore, a rate hike on the heels of the June rate hike would have been out of line with the FOMC's view that "...further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term."

In brief, raising rates today would have hurt the FOMC's credibility and sent the capital markets into a tizzy given the uncertainty that would have been unleashed by an unforeseen rate hike.

Beyond the first paragraph of the directive, nothing changed. The wording was virtually identical with the June directive, with the exception of course being that there was no rate hike language in the August directive.

In the same vein, there were no dissents over the policy action -- or lack thereof we would say.

The minutes from this meeting, which will be released August 22, could reveal some differing views about the Fed's rate-hike path and/or its balance sheet management. What was also clear in the August directive, though, is that Fed Chairman Powell still has the full backing of FOMC members, including alternate member, Kansas City Fed President Esther L. George, who voted at the August meeting.

The stock market, the Treasury market, and the dollar didn't show much reaction following the FOMC decision nor should they have. It was a decision market participants saw coming, which is exactly how the FOMC likes it.

--Patrick J. O'Hare, Briefing.com

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