The Federal Reserve left interest rates unchanged in an unanimous decision following rate cuts at the three previous Federal Open Market Committee (FOMC) meetings. This outcome was in-line with expectations especially following the solid November jobs report which removed any doubt that further accommodation was necessary.

The major change in the FOMC's statement was removing a section discussing risks to economic growth indicating increased confidence in the economy's resilience. Another major focus of the meeting was the dot plot projecting participants' appropriate rate paths. This showed a significant dovish revision as only one rate hike is projected till 2022 and two till 2023.

This is now consistent with fed funds futures markets. For the next FOMC meeting in late-January, there is a 93% chance that the Fed leaves rates unchanged for the second consecutive meeting.

Other Fed forecasts included unemployment hovering around 3.5% until late-2020 and lowering the long-term Natural Rate of Unemployment to 4.1%. It also kept its forecast for inflation to hit its 2% target by 2021 and maintained GDP growth targets of 2% for 2020 and 1.9% for 2021.

Market Reaction

Market reaction was quite muted to the FOMC especially since there were no major surprises in the official statement or projections. However, this changed at Federal Reserve Chairman Jerome Powell's press conference when he surprised markets by saying, "We think our policy rate is appropriate and will remain appropriate as long as incoming data are keeping in with our outlook. To move rates up, I would want to see inflation as persistent."

This represents a dovish shift in Fed policy - tolerance for higher inflation before it raises rates. By this metric, Powell shouldn't have raised rates in 2017. Powell's statement resulted in a modest boost in stocks but riskier assets exploded higher, the US dollar dropped, and the yield curve steepened. The Fed's preferred measure for inflation is Core PCE which currently reads 1.60% well below its preferred 2% level. Rate hikes are off the table for a while.

Another interesting portion of the press conference was Powell addressing the Fed's recent repo actions. Powell insisted that it's not QE despite the Fed balance sheet increasing in size. Powell described it as the Fed providing liquidity to overnight repo markets to prevent any disruptions that could ripple across other markets.