Fed holds off on rate hike,but hike within the year still probable:Upcoming data remains vital for t

In line with our expectations, the Fed delayed the rate hike once again, as mixedstrength of recent data failed to give the Fed a convincing enough case to hikerates amid recent global volatility; indeed, the FOMC highlighted "recent globaleconomic and financial developments" as a potential headwind on economicactivity. Without data strengthening enough to provide a clear cut case for a ratehike, the Fed is likely to choose the conservative option in a global context ofdowngraded economic growth expectations, increasing deflationary pressures, andmajor financial market volatility.

    With that said, momentum is still moving for a rate hike within the next severalmeetings; if the US recovery proceeds along its current trajectory and externalvolatility settles down, a hike within the year is still the baseline case. Yellen onceagain took care to emphasize the rate hike path was more important than thetiming of the initial hike. We expect a 25 bps hike before the end of 2015, andbelieve the pace of following rate hikes would be much slower compared withhistorical cases. According to this month’s FOMC forecasts, the medianexpectations for the interest rate is 1.375% in 2016, and 2.625% in 2017, implyinga gradual hike pace of 100 bps per year; this is roughly half the pace of theprevious round of rate hikes in 2004-2006.

    Also in line with earlier expectations, the FOMC revised up its GDP projections(1.9% to 2.1%) while tuning down headline inflation forecasts (0.7% to 0.4%) andlowering the expectation for the unemployment rate (5.3% to 5.0%). We will revisitour forecasts shortly. 13 of 17 Fed policymakers forecasted a rate hike in 2015,down from 15 at the last meeting in June. Four policymakers now believe ratesshould not be raised until 2016, up from two in June. Following the FOMCannouncement, equity markets closed mixed in the US and the USD dipped aswell.