The Federal Reserve, it seems, is still waiting for the economic equivalent of perfection and risks squandering a good opportunity to begin normalising interest rates.
While this may be part of a well-intentioned effort to prepare the ground for investors and avoid a market shock when the increase finally comes, every delay only further reinforces unrealistically dovish expectations.
Stocks rose ahead of the Fed’s decision on Wednesday, in true Pavlovian style, as even the most inattentive equity long must by now have grasped that pre-FOMC trading days are usually the most upwardly biased. The dogs had their reward when the Fed came out with no change in policy and an equivocal statement giving plausible cover for waiting several months before any hike in rates.
The S&P 500 rose by 0.73 per cent on the day.
The Federal Open Market Committee said "economic activity has been expanding moderately in recent months," while dropping an earlier reference to activity having changed little in the first quarter. The FOMC upgraded its assessment of labour markets but chose to look through recent further declines in energy and commodity prices, calling them "transitory" and anticipating that their effects will "dissipate".
All of that seemed reasonably hawkish, and on its own might have primed the market for September action, but for the insertion of the world "nearly" in front of "balanced" when describing the upside and downside risks to the Fed’s mandates.